Summary
Accounting research has expansively analyzed the value of the relevance of accounting information to evaluate the usefulness of financial data to investors. The primary aim of financial statements and accounting is to offer insightful information that can be used for efficient decision making by stakeholders. In a corporate setting, investors are regarded as the main group of decision-makers using accounting information. Such data is considered as value relevant if it has forecasted association with stock prices or returns.
Tiron-Tudor and Achim (2019) confirmed that the quality of accounting information depicted the significance of accounting value. Global research on the value and impact of financial statements is partially motivated by the fact that public corporations utilize such reports as the main medium to communicate with investors and the general public (Tiron-Tudor & Achim, 2019). A strong stock market is that which new information regarding stock prices is added, making the prices for the companies stable and accurately valued.
Nevertheless, because of misevaluations of corporations by public capital markets, company managers are required to provide financial information to rectify the misevaluations. Considerable research has been conducted in the finance literature, and the findings suggest that financial reporting and disclosure have a significant impact on the stock market reaction (Ghosh & Ghosh, 2015; Hung, Ha & Binh, 2018; Dang, Tran & Nguyen, 2018; Wambugu & Essajee, 2016).
Therefore, capital market participants comprising investors and brokers tend to follow corporate financial information release by listed companies closely. Stock prices change in response to knowledge of several financial variables obtained from financial statements. Empirical evidence shows the existence of a positive relationship between earnings per share, net asset value per share (book value), enterprise size, and corporate social responsibility have a positive correlation with the stock price (Ghosh & Ghosh, 2015; Hung, Ha & Binh, 2018; Dang, Tran & Nguyen, 2018; Wambugu & Essajee, 2016). In developing economies, the relationship between the disclosure of financial information and stock prices has been investigated.
Ghosh and Ghosh (2015) employed a regression model of earnings per share and book value of 25 private commercial banks listed in the Dhaka Stock Exchange in Bangladesh. The results showed that the two financial variables were responsible for 80.81% of the market’s stock price volatility. In the context of Vietnam, several studies, such as Hung, Ha, and Binh (2018) and Dang, Tran, and Nguyen (2018), have examined the relationship between financial reporting and disclosure and stock prices. In Hung, Ha, and Binh (2018), the findings illustrated that accounting information comprising enterprise size, return on assets, accounts receivable turnover, and current ratio impacts stock price with an explanation of 48.47%. Similarly, Dang, Tran, and Nguyen (2018) researched 273 listed companies in Vietnam and found that book value, earnings per share, firm size, and cash flow from operating activities positively affected stock price, with an explanation level of 48.1%.
However, it is essential to note that disclosures can either be compulsory or voluntary. On the one hand, some information, for instance, statement of transactions, risk assessments, quarterly reporting to sources and use of funds, CFO/CEO certification, and compliance reports are mandatory. On the other hand, non-mandatory information includes performance evaluation of non-executive directors, unqualified audit reports, and whistleblowers. Voluntary disclosure has been positively correlated to stock prices. Wambugu and Essajee (2016) aimed to investigate the influence of voluntary financial disclosures on stock price in the Nairobi Stock Exchange. The results indicated that stock price was positively influenced by corporate social responsibility, corporate governance, environment accounting, dividend payout, and firm size.
Overall, the before-mentioned research has provided insights into the factors associated with stock prices. Moreover, the evidence reported in these studies as considerably consistent with the Efficient Market and information content hypotheses. They insinuate that financial disclosures contain value-relevant information and the stock market rapidly and efficiently reacts to such information.
Areas Needing Further Exploration
Limited research has provided recommendations for further studies. Tiron-Tudor and Achim (2019) have suggested that further studies investigating the effect of accounting quality on stock price informativeness should expound into emerging markets as it was centered on developed countries. Wambugu and Essajee (2016) suggest that further research should focus on firms’ specific industries since they might react differently to certain information releases. Lastly, Hung, Ha, and Binh (2018) that have centered on evaluating the impact of financial reporting on stock prices among energy enterprises in Vietnam, propose that further research considers the analysis of new factors on the stock price. These will be aside from the current ratio, return on assets, enterprise size, accounts receivable turnover, and capital structure.
Annotated Bibliography
Investigation of the impact of financial information on stock prices: The case of Vietnam. Academy of Accounting and Financial Studies Journal.
This article discusses the impact of financial information on stock prices in Vietnam. The authors collected information from 273 large listed companies in the Vietnam Stock Exchange. The regression analysis indicated that financial variables, such as book value, earnings per share, firm size, and cash flow from operating activities. The findings indicated that variables positively correlate with stock prices, with an explanation level of 48.1%. Nevertheless, the authors failed to mention their study’s strengths and limitations, thus limiting its accuracy.
Stock price adjustment to corporate accounting disclosure: A quantitative study of Dhaka Stock Exchange (DSE), Bangladesh. International Journal of Accounting and Financial Reporting.
The study aimed to investigate the relationship between financial information disclosure and stock price adjustment. The findings suggested that net asset value per share, earnings per share, and return on equity positively correlated with the stock price. Similar to other mentioned studies, the authors also failed to consider the strength and limitations of their studies hence impacting its accuracy.
Impact of accounting information on financial statements to the stock price of the energy enterprises listed on Vietnam’s stock market. International Journal of Energy Economics and Policy.
The authors utilized a regression model to investigate the effect of accounting information present in financial statements on stock prices in the Vietnam stock market. The results found a 48.47% explanation level on the positive correlation between accounts receivable turnover, return on assets, firm size, and current ratio. However, a negative but statistically insignificant correlation was found between capital structure and stock prices. The study failed to regard its strengths and limitations, thereby impeding its accuracy.
Accounting quality and stock price informativeness: A cross-country study. Economic Research.
This article discusses the impact of the accounting quality of company-specific information on stock prices. The authors utilized data from 18 developed economies that utilize international accounting and financial reporting standards (IFRS). They used stock price synchronicity and idiosyncratic volatility as measures of stock price informativeness. The results indicated a negative correlation between accounting quality and stock price synchronicity. Conversely, there was a positive correlation between accounting quality and the amount of firm-specific information identified under stock prices. However, the article is not that well-descriptive as the authors did not list the limitations of their research.
The effect of voluntary financial disclosures in stock returns of firms quoted on the Nairobi Securities Exchange. International Journal of Finance and Accounting.
The study aimed to establish the influence of voluntary financial disclosures on stock return for companies listed on the Nairobi Stock Exchange. The authors used a descriptive research design. A regression analysis found a positive correlation between corporate social responsibility, environmental accounting, enterprise size, dividend payout, and corporate governance on stock prices. However, the authors used a purposive sampling technique, minimizing the generalizability of their findings in developing economies.