The study aims to measure the relationship between accounting information and stock price reaction in the Saudi market. The paper analyses the various relationships between the decision-making process in investments in those listed in the Saudi Stock Market and specific accounting information systems’ features. The research utilizes the qualitative method to obtain the necessary data needed to make the conclusion. After a thorough literature search, a number of sources are selected and used to draw the relevant information required to answer the research question. Some of the accounting information system features which are common among all the companies listed in the stock market in Saudi Arabia include appropriateness, appropriateness, reliability, and comparability. The articles analyzed revealed an association between accounting information system features and the decision-making processes in the various industrial companies listed in the Saudi Stock Market. Similarly, there is a significant positive relationship between accounting information and the stock market price reaction in Saudi Arabia from the literature analyzed.
The study aims to identify the relationship between Accounting Information and Stock Price Reaction in the Saudi Market. The study would also look at the characteristics of all the accounting information of all the companies listed in the Saudi stock market. This would help determine which of the companies in the oil industry have positive growth rate records. Investors would use this to make some informed investment decisions on the right company in the market. The problem would also look at some of the impacts of using the software in the computerized accounting systems’ software by these companies’ policymakers. There are no studies that have identified the relationship between accounting information and the stock market reaction in the Saudi market. It is essential to understand how the market operates to ensure that this country’s economic challenges are solved. The state must fully serve its leading sector of the economy and provide a significant increase in the revenue collected from this main sector of the country’s economy.
Research Questions
- Is there an association between the investment decision-making processes in the various industrial companies listed in Saudi Stock Market?
- What are some of the accounting information system features of all the companies listed in the stock market in Saudi Arabia?
- What is the significant relationship between the accounting information and the stock market price reaction in Saudi Arabia?
Objectives of the Study
The study has some specific objectives that it wishes to address. Some of the goals of the study would include:
- To examine some of the associations between the investment decision-making processes in the various industrial companies listed in the Saudi Stock Market.
- To identify the features of the accounting information system of all the companies listed in the stock market in Saudi Arabia
- To examine and understand the significant relationship between the accounting information and the stock market price reaction in Saudi Arabia.
Significance of the Study
The importance of this study depends on the practical and theoretical aspects and the decision taken by the policymakers. The functional significance is to identify the accounting information system, which is computerized. It will also determine the importance of some of the features of the decision-making process in the investments. The theoretical aspect takes into consideration some of the new variables, which are made aware to the researchers of the issue. These variables can be updated to maintain all the software and the hardware used in accounting information systems. The variables are also very essential in the effectiveness of the process of decision-making. The study is also seen to be of great significance to both the owners of the businesses and the investment decision-makers like the company’s managers and head of departments. The management team of various organizations relies on the computerized accounting system results when making significant investment decisions.
Literature Review
In today’s changing world and business uproar, every entrepreneur and business firms need to understand the significance of applying the Accounting Information System (AIS) to enhance business performance. Profit and non-profit-oriented organizations need to adopt the AIS system to achieve their set aims and objectives (Oraby, 2017). In the current economy, Accounting Information System is defined as a computer-based technique that aids in monitoring a firm’s financial transactions in relation to its provided information technology incomes (Khamis, Anasweh & Hamdan, 2018). The economic data acquired through AIS helps various managers to make effective decisions on internal and external matters of the company. It also enables different organizations to analyze and predict their future performance, making it possible to adjust their key development areas (Trabulsi, 2018). Various business operators worldwide recognize AIS application since they believe it shapes the economic phenomena and developments (Mubarak & Elsheikh, 2017). Thus, it is evident that the Accounting Information system enhances the optimization of a company’s success and value, hence securing a competitive advantage within the market.
For many years, various companies have used accounting information systems to enhance their decision-making and overall success. According to research done by Alawaqleh & Al-Sohaimat (2017), the dependence of Saudi Arabia on oil has brought several shortages to the company. As a way of addressing the challenge, Saudi Arabia’s government has formulated a strategy of encouraging foreign investment as a way of overcoming financial shortcomings (Alawaqleh & Al-Sohaimat, 2017). To support the companies operating in the economy, the government constantly recommends and advises the organizations to focus more on addressing their financial problems through stringent measures (Alawaqleh & Al-Sohaimat, 2017). The most prevalent challenge that Saudi Arabia has experienced with regards to maintaining the outside investors has been financial issues. However, the study by Alawaqleh and Al-Sohaimat (2017) also reveals that there have been other political, economic issues that Saudi Arabia has experienced in connection to bringing more investors into its economy.
However, in its quest to have more foreign investment in the country, the government of Saudi Arabia has been criticized by various stakeholders for not having clearly defined methods for attracting more investment in the country (Alawaqleh & Al-Sohaimat, 2017). Studies also reveal that potential foreign investors do not have substantial financial and accounting information from the Saudi stock exchange’s industrial companies (Alawaqleh & Al-Sohaimat, 2017). Accountants can play a critical role in attracting new investments if they remain transparent with their financial information. All organizations consider accounting information one of the most important and critical factors that can influence their overall performance (Alawaqleh & Al-Sohaimat, 2017). Studies show that accounting information has been a key aspect for most organizations in the technological and globalization era since many of them are striving to lower the accounting costs through well-developed technologies in the market (Alawaqleh & Al-Sohaimat, 2017). With the adoption of top-notch technologies, the companies can make appropriate decisions stirring them towards success.
Stock markets are designed to provide a platform where companies can effectively maintain their liquidity and ensure constant economic growth. A study conducted by Delkhosh (2016) reveals a positive correlation between accounting system information and stock price reaction. From the research, it was revealed that accounting financial information such as earning data could have an impact on aspects such as returns which affect the stock price. Integrating a number of ideas from past studies, Delkhosh (2016) shows how accounting information can be instrumental in helping various stakeholders to make effective decisions when stocking prices in the market change. Alawaqleh and Al-Sohaimat (2017) also confirm that there is a relationship between stock price reaction and accounting information since investors need the latter to made decisions regarding the former aspects.
Accounting Information System incorporates different elements which are crucial in the accounting cycle. Similar to many other countries, Saudi Arabia has adopted the use of Accounting Information System in managing different business entities within the country (Mubarak & Elsheikh, 2017). AIS development has been one of the major developments around the globe. As such, Saudi Arabia’s government views the system as the most active element of investment (Mubarak & Elsheikh, 2017). The good use of AIS by different firms in the country is believed to have contributed to gross domestic product (GDP) (Alawaqleh & Al-Sohaimat, 2017). Therefore, it is not only valuable for organizations operating in the country but also for the government.
The role which accounting plays in capital allocation is instrumental especially when the investors in the market have limited capital resources, but they need to optimize their performance. Research conducted by Oraby (2017) reveals accounting information critical in helping various stakeholders to make effective, timely, relevant, and accurate decisions. Thus, according to the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), the main role of accounting is to effectively address the needs of the capital markets (Oraby, 2017). However, when considering accounting roles, it is critical to acknowledge that the quality of the information utilized is highly significant to various users who need to make varied decisions (Trabulsi, 2018). Therefore, accounting information has to be well formulated to meet the demand of multiple users.
The history of Accounting reforms in Saudi Arabia is not long compared to those of other economies. This is because, before the adoption of the Saudi Organization of Certified Public Accountants (SOCPA), the country did not have any significant accounting standards. Before SOCPA, the government adopted various international accounting standards that barred the organizations from maintaining a standard accounting system (Trabulsi, 2018). SOCPA was established in the year 1992 by a royal decree which enabled the body to have the power to develop, review, approve accounting standards and audits in the country (Oraby, 2017). However, since the measures were adopted, they have received a few critics who believe that the international standards are better. Some of their reasons for championing international standards include the that the SOCPA uses US standards that are complicated and highly detailed compared to international standards (Oraby, 2017). Moreover, the critics argue that numerous stock exchanges currently accept the international accounting standards. Therefore, to effectively compete in the global capital markets, it is important for the country to reconsider the adoption of the international accounting standards (Oraby, 2017).
There are other policies and ideas that are being advocated for regarding accounting systems in Saudi Arabia. For instance, there are those who champion for a decentralized management accounting process where the roles of the accountants will significantly decrease (Oraby, 2017). The accountants are supposed to serve more as consultants who manage the progressing work and motivate other employees in the organization. By adopting such strategies, the companies will maximize their use of accounting but still reduce the work done by management accountants (Khamis et al., 2018). Over the years, technology has been vital in enhancing the changes recorded in the accounting field (Oraby, 2017). Additional factors that have led to changes in accounting profession include the rise of the knowledge economy and the globalization of the economy (Khamis et al., 2018). Thus, it is important to compare the advancement in the current accounting environment to those in the past.
Factors such as the involvement of the government in the ownership and management have been critical in dictating the Saudi’s economy. Therefore, the structure of capital and size of certain companies in the industry and service sectors are impacted by government management (Khamis et al., 2018). The immense involvement of the Saudi government in the ownership of the companies enables the management negotiate with the stakeholders who may be the shareholders or the financiers (Oraby, 2017). However, Saudi market is not fully developed with the banking and oil industry being the major players in the financial market system (Oraby, 2017). Regulations in the economy have intensified the efforts to improve control of variations in the stock market.
One of the emerging trends in recent years has been cloud computing which has gained significant popularity. The cloud computing ideology has recorded remarkable changes over the past years since it has moved businesses from traditional accounting practices, which were centralized, static, and operated within closed systems (Khamis et al., 2018). The cloud computing practices which have since been adopted include timely, comprehensive, and dynamic. The adoption of cloud computing is important since it can enable accounting tasks of the organization to continue offsite. It is important to recall that Saudi Arabia is an oil-based country with one of the largest oil reserves in the world (Khamis et al., 2018). Currently, it is among the current largest producers and exporters of crude oil. The size of the country has extremely grown in the past decade, similar to the size of the companies operating in different industries.
According to Khamis, Anasweh, and Hamdan (2018), there are numerous sources linking the relation between the prices of oil in Saudi Arabia to the macroeconomic and financial variables. The author argues that the prices of oil can impact variables such as consumer price index, interest rates, gross domestic product, industrial production, and unemployment (Khamis, Anasweh, and Hamdan 2018). According to research, the prices of oil are likely to have an indirect or a direct negative impact on the performance of the stock market. It can indirectly affect the markets by contributing to inflation, which eventually affects the stock market. Studies show that positive shocks on the oil prices have a constructive effect on the performance of the stock market within the oil exporting countries such as Saudi Arabia. Khamis, Anasweh, and Hamdan (2018) document a study done by Mohanty et al (2011) which explored more on the effect of changes in the oil prices on the stock markets using country and industry level. From the study it was determined that all the stock markets of the GCC had a positive relation with the oil prices except for Kuwait (Khamis, Anasweh, and Hamdan, 2018). The research was quite informative although its major drawback was the fact that it did not consider oil price returns and stock market.
Methods
The research is qualitative in nature since it utilizes secondary sources in obtaining the data used to draw the results and make the necessary conclusions. To address the research questions and meet the objectives of the study relevant source relating to the Saudi Arabian market are collected and compared to select the best which directly addresses the issues in consideration. The information obtained from the relevant authorities is effectively compared to reach appropriate conclusions regarding various ideas. One of the sources chosen for analysis after an extensive literature search on different online databases and libraries is a journal by Alawaqleh and Al-Sohaimat published in the year 2017 in the International Business Research Journal. The other source which is selected after a thorough search is written by Mubarak and Elsheikh. It is published in the Journal of Business and Economics Policy in the year 2017. The use of secondary sources is applicable in the research because it saves time and helps improve the understanding of the topic.
Results
There are a number of characteristics unique to the accounting information applied by companies listed in the Saudi Arabia Stock exchange. Some of the accounting information system features which are common among all the companies listed in the stock market in Saudi Arabia include appropriateness, appropriateness, reliability, and comparability (Alawaqleh & Al-Sohaimat, 2017). Various listed companies in Saudi have accounting information system features that are relevant and directly impact the users (Alawaqleh & Al-Sohaimat, 2017). The accounting information is instrumental to different stakeholders because they help evaluate past, present, and future events to assist in effective decision-making. The data is appropriate because they enable the companies to make future predictions regarding the performance of the companies (Alawaqleh & Al-Sohaimat, 2017). The importance and nature of the organizations’ information are important in dictating the appropriateness of the data.
The users of accounting information in the listed companies in Saudi Arabia are handled by professionals who have significant knowledge in economic activities, business, and accounting. Therefore, the accounting systems’ information has to be understood and comprehended among the professionals (Alawaqleh & Al-Sohaimat, 2017). For information to be useful to different stakeholders, it has to be reliable. The users should have confidence in it, and it should be free of errors that might reduce its quality (Alawaqleh & Al-Sohaimat, 2017). The financial information utilized by the listed companies in Saudi Arabia gives an accurate reflection of various events and financial transactions that have transpired within the organization (Alawaqleh & Al-Sohaimat, 2017). The information used by different players in the economy is suitable and complete.
The other significant feature relating to the accounting information features of listed companies in Saudi Arabia is the comparability of the information. Most of the details used within the accounting systems are standard hence enable inter-departmental comparison and industrial comparisons (Alawaqleh & Al-Sohaimat, 2017). The information used can also be compared for different time frames to give more visibility of performance over time (Alawaqleh & Al-Sohaimat, 2017). Comparability of the accounting information utilized by various companies is also instrumental because they enable the users to make a critical decision related to finance, investment, financial position, and comparison with similar companies within the industry.
Alawaqleh and Al-Sohaimat (2017) conducted a survey on Saudi Arabia listed companies to determine the relationship between investment decision processes and features of the accounting information systems in place. The researchers utilized multiple regression techniques to determine the association (Alawaqleh & Al-Sohaimat, 2017). Based on their study, there is a positive correlation between investment decision making and reliability and appropriateness, which are key accounting information features in Saudi Arabia. An increase in reliability and appropriateness results in a more effective decision (Alawaqleh & Al-Sohaimat, 2017). Based on the study, there was also a direct association between investment decision making processes and features such as comprehension
Mubarak and Elsheikh (2017) researched to determine the factors affecting stock prices in the stock market of Saudi Arabia. The research was focused on determining the perspectives of the investors. The study utilized 119 respondents and considered 5 major categories that possibly impacted stock prices for companies in Saudi (Mubarak & Elsheikh, 2017). These categories included personal financial needs, advocate recommendation, accounting information, self-image coincidence, and neutral information. From the study, it was evident that the most significant impact influencing the stock price from the investor’s perspective was the accounting information (Mubarak & Elsheikh, 2017). It was followed by self-image coincidence in the second place, personal financial needs, advocate recommendation, and neutral information respectively (Mubarak & Elsheikh, 2017). These results reveal the perception of the investors on the factors which influence the reaction to stock market prices in Saudi Arabia.
Conclusion
There are four main features of accounting information systems that are common among the Saudi Arabian listed companies. They include appropriateness, appropriateness, reliability, and comparability. There is an association between these features and the decision-making processes in the various industrial companies listed in the Saudi Stock Market. From the study analyzed, there was an association between the decision-making processes and reality and appropriateness. The research also established a positive correlation between the decision-making processes and the two other features. From another study analyzed, it is possible to conclude that there is a significant positive relationship between accounting information and the stock market price reaction in Saudi Arabia. This is because, from a study conducted on a sample of investors, the majority of them supported accounting information to be a significant factor influencing how investors react to the stock market price in Saudi Arabia.
Recommendations
From the findings and conclusions reached there are a number of recommendations which can be considered by organizations operating in Saudi Arabia. First, to maximize the efficiency of their accounting systems, the companies have to ensure that all their information is comprehendible, reliable, appropriate, and comparable. By meeting these critical characteristics, they will be using accounting information that can enable them to make effective decisions of investment, growth, and finances, among other areas.
Moreover, it is important for organizations listed in the Saudi Arabia stock exchange to consider applying the four features of accounting information system when making investment decisions because they have an association. Using the correct decisions for investment decisions is critical in ensuring the growth of the organization as well as the satisfaction of the shareholders. Failure to consider information complying to the four characteristics can result in wrong investment decisions, which may, in turn, result in losses and discourage the shareholders from participating in the organization’s activities.
Lastly, it is important for listed companies in Saudi Arabia to focus on improving the quality and accuracy of their account information as a way of reacting to the stock market price fluctuations. Moreover, by increasing the accuracy of their accounting information, organizations can make relevant decisions when the prices of stock change within the market. The stock markets are highly volatile, therefore, having the correct information can help improve the organization’s decisions, which, in turn, can help reduce the errors that may occur due to the continuous changes.
References
Alawaqleh, Q., & Al-Sohaimat, M. (2017). The Relationship between Accounting Information Systems and Making Investment Decisions in the Industrial Companies Listed in the Saudi Stock Market. International Business Research, 10(6), 199-112. doi: 10.5539/ibr.v10n6p199
Delkhosh, M. (2016). Correlation between accounting information and stock price. International Journal Of Multidisciplinary Research And Development, 3(2), 294-297.
Khamis, R., Anasweh, M., & Hamdan, A. (2018). Oil prices and stock market returns in oil exporting countries: Evidence from Saudi Arabia. International Journal of Energy Economics and Policy, 8(3), 301-306.
Mubarak, B., & Elsheikh, O. (2017). Factors Affecting Stock Prices in Saudi Stock Market from the Investors’ Perspective in Najran City-a Behavioral Approach. International Journal of Business and Management Review, 5(8), 30-42.
Oraby, S. A. (2017). IFRS and accounting information relevance: the case of Saudi Arabia. Journal of Business & Economic Policy, 4(1). 1-11.
Trabulsi, R. U. (2018). The impact of Accounting Information Systems on organizational performance: The context of Saudi’ s SMEs.International Review of Management and Marketing, 8(2), 69-73.