solved Value Relevance of Accounting Information in the United Arab Emirates

Value Relevance of Accounting Information in the United Arab Emirates Jamal Barzegari Khanagha Faculty of Economics, Management and Accounting, Yazd University, Iran E-mail: barzegari@yazduni.ac.ir Tel: +989131519858 ABSTARCT: This paper examines the value relevance of accounting information in per and postperiods of International Financial Reporting Standards implementation using the regression and portfolio approaches for sample of the UAE companies. The results obtained from a combination of regression and portfolio approaches, show accounting information is value relevant in UAE stock market. A comparison of the results for the periods before and after adoption, based on both regression and portfolio approaches, shows a decline in value relevance of accounting information after the reform in accounting standards. It could be interpreted to mean that following to IFRS in UAE didn’t improve value relevancy of accounting information. However, results based on and portfolio approach shows that cash flows’ incremental information content increased for the post-IFRS period. Keywords: Value Relevance, IFRS, Accounting Information, UAE 1. Introduction Over the last three decades, the world economy and capital markets have become increasingly globalized and integrated. In this respect, the benefits of having one set of high-quality globally recognized financial reporting standards are significant. Since convergence and harmonization of national Generally Accepted Accounting Principles with International Financial Reporting Standards (IFRS) promises “transparent, comparable and consistent financial information” to guide investors in making “optimal investment decisions” (Jacob & Madu, 2004). The harmonization of accounting standards is also absolutely vital to building long-term global financial stability, creating truly international capital markets and providing full transparency for credit management(Hansen, 2003). The United Arab Emirates (UAE), currently launching itself onto the world financial stage with the setting up of a stock exchange and actively pursuing foreign direct investment (FDI) by embracing globalization, and adopting IFRS (Irvine & Lucas, 2006). Wagdy (2001) asserts that investors’ need for reliable and relevant financial information has been the key factors of accounting reform in the Middle East. These two factors protect domestic and foreign investors from any fraud or misleading financial data. Value relevance approach measures both relevance and reliability because accounting information is reflected in the price (Barth, Beaver, & Landsman, 2001). however, value relevance approach is an instrument to estimate quality of accounting information, which is a prime importance to the well-functioning of the economy (Beuselinck, 2005). Despite all efforts to develop in financial markets, accounting and economic growth, a crucial gap in the literature remains: to the best of our knowledge, there is no empirical research to identify the effect of accounting standards reforms on value relevance of accounting information in the UAE. Consequently, this study aims to investigate the value relevance of accounting information in UAE. In particular, it measures whether the quality of accounting information has improved or whether it has not yet become relevant despite all efforts. The reminder of this paper is organized as follows. Continuance of this section contains background and literature review and followed by a review accounting in UAE. The second section related to methodology subjects and selecting data and sample. The third section discusses research findings. Summary and discussions are presented in the final section. International Journal of Economics and Financial Issues, Vol. 1, No. 2, 2011, pp.33-45 34 1.1. Background and Literature Review A value relevance study is evaluation of the relationship between accounting information and capital market values (market values). Beaver (2002) indicated that the theoretical groundwork of value relevance studies adopting a measurement approach is a combination of valuation theory plus contextual accounting and financial reporting arguments (accounting theory) that allows the researcher to predict how accounting variables and other information relating to market value will behave. Holthausen and Watts,(2001) suggest that value relevance studies use two different theories of accounting and standard setting to draw inferences: (i) “direct valuation” theory and (ii) “inputs-to equity-valuation” theory. Direct valuation theory proposes a link between accounting earnings and stock market value. In direct valuation theory, accounting earnings is intended to either measure or be combined with the equity market value changes or levels. However, Zaleha et al. (2008) point out that the conclusion usefulness paradigm proposes that accounting information is useful if utilized by users of financial statements for, or significantly associated with their decision making (Riahi Belkaoui, 2000) even though the information might not be stated at their best current value (Scott, 2000). Within this conception, the main users are those who make decisions having an impact on firms’ value, specifically decision-making by capital market participants (Beaver, 2002; Riahi Belkaoui, 2000). In discussing the concept of relevance with regard to accounting information, Riahi-Belkaoui (2000) believes that accounting information is relevant if the information can influence decisions made by decision makers (i.e., its value relevance concept). Studies seeking to demonstrate a link between accounting numbers and equity values were first published over 40 years ago. The first such article was by Miller and Modigliani (1966), which used data from the electricity industry to demonstrate that capitalized earnings on assets make the largest contribution to marketplace value. Ball and Brown (1968) and Beaver ( 1968) are generally recognized as the fundamental studies on the information value of accounting numbers. Ball and Brown showed that the information content of the earnings figure is related to stock prices, and Beaver observed both price and volume reactions to earnings reports. Numerous value relevance studies have established, one stream of literature focuses on whether the value relevance of accounting information has declined/increased over time. Prior research provides conflicting views. On the one hand, several prior literatures have found that the value relevance of accounting information has declined in recent years (Core, Guay, & Van Buskirk, 2003; Ely & Waymire, 1999; Francis & Schipper, 1999; Graham & King, 2000; Ho, C-S Liu, & Sohn., 2001; Lev & Zarowin, 1999; Marquardt & Wiedman., 2004; Thinggaarda & Damkierb, 2008). On the other hand, A number studies also have been carried out in recent years that showed value relevance of accounting information has increased. Qystein and Frode, (2007) evaluated the relevance of financial reporting over a relatively long period (over 40 years ). Their research results showed that the valuerelevance of Norwegian GAAP was non-declining throughout 1965 to 2004. Dung (2010) tested the value-relevance of financial statement information on the Vietnamese stock market. The results showed that the value relevance of accounting was statistically meaningful, though somewhat weaker than in other developed and emerging markets. Filip (2010) investigated the impact of the mandatory IFRS adoption on the value relevance of accounting in Romania. Findings suggest that the implementation of IFRS increased the value relevance of earnings. Aljifri and Khasharmeh (2006) investigated empirically the suitability of the international accounting standards (IASs) to the United Arab Emirates (UAE) environment. They used a variety of parametric and nonparametric approaches to examine the underlying factors that could affect the level of adoption of IASs and to evaluate the suitability of such adoption to the UAE environment (e.g. size of company, trading status, type of sector).The study found that there is a general consensus among the user groups (auditors, brokers, finance managers, and financial analysts) on the suitability of adoption of IASs in the UAE. In all of research studies that have been carried out there are no mention of the value relevance of accounting information in the UAE. To the best of our knowledge, there is no empirical research also that uses regression-variations and the portfolio-returns approaches to test of value relevance in this country. Therefore, an evaluation of the value relevance of accounting information, especially after changes in the economic and accounting environment in recent years is an important area to research. Value relevance of accounting information in the United Arab Emirates 35 1.2 Accounting in UAE There are three main regulatory authorities in the UAE corporate sector: the ministry of economy and planning, the central bank, and the emirates securities and authority of raw materials. In addition, the accountants and auditors association is the official body representing the accounting profession in the country. The compulsory disclosure requirements of state enterprises that each company must prepare financial statements, balance sheets, cash flow statements, statements of changes in capital, and the notes to the accounts. It should be noted that in the UAE, companies preparing their annual reports within two to three months of the end of fiscal year (Khaled Aljifri & Hussainey, 2007). According to Central Bank Circular No 20/99, banks, financial institutions and investment companies in the UAE are required to prepare their financial statements in accordance with the International Accounting Standards (IASs) with effect from January 1, 1999. In 2004, the UAE established the Dubai International Financial Centre (DIFC), which is an onshore capital market designated as a financial free zone. In 2006, the DIFC legal framework requires banks and companies listed on the Dubai International Foreign Affairs (DIFX) to implement International Financial Reporting Standards (IFRS). all companies listed on market in Abu Dhabi (ADSM) are required to publish IFRS financial statements since 2003 (Khaled Aljifri, 2008; Deloitte, 2007). 2. Methodology In this study, the regression-variations and the portfolio-returns approaches was used to investigate and to operationalize the value relevance of accounting information. It was because they provide different perspective on the issue of value relevance of accounting information. By using the regression-variations approach, we measured the value relevance as the percentage of variations in the returns or market value explained by the accounting figures. Portfolio-returns approach shows a portion of total returns that could be earned from financial statement information which control for changes in the volatility of market returns over time. 2.1. Regression-Variations Approach A regression-variations approach measures value relevance based on the explanatory power of accounting information as a measure of market value; the ability of earnings to explain annual marketadjusted returns (return model); and the ability of earnings and book values of equity to explain market values of equity (price model). 2.1.1 Earning Return Model A large volume of literature has examined the usefulness of earnings information by employing a market return model (Chen.C. J, Chen. S, & Su. X, 2001; Harris, Lang, & Peter, 1994). In particular, the return model developed by Easton and Harris (1991) has been immensely popular amongst value-relevance researchers (Ali & Zarowin, 1992; Amir, Harris, & Venuti, 1993; Chan & Seow, 1996; Chen.C. J et al., 2001; M. S. Harris & K. A. Muller, 1999; Harris et al., 1994; Haw & Qi, 1999), because it incorporates both earnings level and earnings changes as independent variables in explaining the dependent variable: annual market return on stock. The present study used Easton and Harris (1991) model with adjustments and suggested by Biddle et al. (1995) and used in subsequent research(M. Harris & K. Muller, 1999; Jun Lin & Chen, 2005; Kothari, 2000). Rjt = β0 + β1 EPSjt / Pjt-1 + β2 (EPSjt – EPSjt-1) / Pjt-1 + ejt Rjt: annual return (including cash dividends) of firm j shares for period t Pjt-1: stock price at date of accounting announcement for firm j during period t EPSjt: annual earnings per share for firm j during period t EPSjt – EPSjt-1: change annual earnings per share for firm j from period t-1 to t ejt: error term 2.1.2. Price Model Following numerous prior value-relevance studies (Amir et al., 1993; M. E. Barth, 1994; Burgstahler & Dichev, 1997; Filip & Raffournier, 2010; M. S. Harris & K. A. Muller, 1999; Landsman, 1986), a price model has also utilized in this study in addition to the return model. Unlike the return model, the price model investigates the impact of accounting information on the market valuation of, rather than return on, equity stock; furthermore, a price model examines the impact of not International Journal of Economics and Financial Issues, Vol. 1, No. 2, 2011, pp.33-45 36 only earnings but also book value of equity on stock performance. Traditionally, earnings and book values are considered to contribute to value relevance (Burgstahler & Dichev, 1997; Ohlson, 1995). Currently, however, the main financial statements include income statement, balance sheet and cash flow statement. Thus the study used the model that shows all of the main financial statement as follows: Pjt = β0 + β1 BVPSjt + β2 EPSjt + β3 CFPSjt+ ejt Pjt: the market price per share of firm j at time t BVPSjt: book value of firm j at time t EPSjt: earnings of firm j for period ending at time t CFPSjt: Cash flow of firm j for period ending at time t ejt : error term 2.2. Portfolio-Returns Approach The portfolio-returns approach defines the value relevance of accounting measures as the proportion of information in security returns captured by the accounting measures (Alford, Jones, Leftwich, & Zmijewski., 1993; Chang, 1998; Francis & Schipper, 1999; Hung, 2001) . Thinggaarda and Damkierb (2008) further defined value relevance as the difference between the return on the long position and the return on the short position; that is, the market-adjusted return that can be earned on the long position and the market-adjusted return that can be lost on the short position. This approach measures value relevance as the total return that could be earned from a portfolio based on perfect foresight of earnings. Value relevance is scaled by the total return earned on a portfolio based on advance knowledge of market prices. In this study, this approach attempts to calculate the proportions of all information in security returns that are captured by the earnings, ROE and cash flows. This method aims to provide the evidence of value relevance of earnings, ROE and cash flows by forming the hedge portfolio based on this information. This study used two portfolios a) a portfolio selection based on sign (SIGN-∆EARN, SIGN-∆ROE, SIGN-∆CF); and b) a portfolio selection based on sign and magnitude (∆EARN, ∆ROE and ∆CF). 2.2.1 Portfolio Selection Based on Sign (SIGN-∆EARN) The Portfolio-Returns Approach is based on Alford et al. (1993), Francis and Schipper (1999), Hellstrom (2006) and Thinggaarda and Damkierb (2008). As an example, following is the procedure for selecting a portfolio based on sign of changes in EARN. First, an earnings-based hedge portfolio is created. The primary Firm-specific return (Pit-Pit-1+d)/Pit-1 is calculated for all firms over a 15 month period. The market-adjusted return on security j, R,t , is defined as the compound (with dividend) return minus the return on the value-weighted market portfolio for each year sample ( The study uses all share index return). All companies in the total sample are ranked according to the change in accounting earnings. The change in accounting earnings is calculated on a year basis. A hedge portfolio is formed by going long in shares with positive earning changes and short in shares with the negative earning changes. The market-adjusted return is later calculated for both the long position and short position as an average of returns for all companies included in the long short positions, respectively: Where Rj is a market-adjusted return for an individual company and NL and NS are the number of companies in the long position and in the short position, respectively. Note that NL and NS are equal. The hedge portfolio return (value relevance) is defined as the difference between the return on the long position and the return on the short position: that is, the market-adjusted return that can be earned on the long position and the market-adjusted return that can be lost on the short position: Second, for each accounting-based hedge portfolio and year, the market-adjusted returns on a portfolio formed on the basis of perfect foreknowledge of future stock returns are calculated. This portfolio takes long (short) positions in the stocks in each accounting-based hedge portfolio with positive (negative) 15-month market-adjusted returns. The market-adjusted return on this returns- Value relevance of accounting information in the United Arab Emirates 37 based hedge portfolio in year t is denoted , where H is the type of accounting hedge portfolio. The accounting-based hedge portfolio returns are expressed as a percentage of . This controls for time-series differences in the variation in market-adjusted returns (Francis & Schipper (1999) , and the resulting ratio (denoted %mkt) describes the proportion of all information impounded in stock prices that is captured by accounting information in a given period (Thinggaarda & Damkierb, 2008). 2.2.2 Portfolio Selection Based on Sign and Magnitude As mentioned above, Portfolio Selection based on sign and magnitude applies to ∆EARN, ∆ROE and ∆CF. following is a description for calculating the value relevance of earning with this method. The method for calculating other factors with the same ROE and cash flow is similar. The primary calculations of market-adjusted returns are similar, based on the sign of accounting information. For example, for the ∆EARNjt portfolio, we take long positions in the stocks with the highest 40% of ∆EARNj,t and short positions in the stocks with the lowest 40% of ∆EARNj,t, thereby disregarding the middle 20%. Thus, both the sign and the strength of the change in earnings are extracted from the total available information in financial statements. The market-adjusted return is afterwards calculated for both the long position and short position as an average of returns for all companies included in the long short positions, respectively. The hedge portfolio return (value relevance) is defined as the difference between the return on the long position and the return on the short position: that is, the market-adjusted return that can be earned on the long position and the market-adjusted return that can be lost on the short position. 2.3. Data and Sample The Data for this study were obtained from the Gulfbase database, the stock exchange website of the Abu Dhabi stock market (ADSM) and other database such as Bloomberg and DataStream. Observations were compared across data sources for data accuracy. The study limit to this period and select Abu Dhabi Securities Markets since a) Abu Dhabi Securities Market (ADSM) started operating in November 2000, b) ADSM is larger than The Dubai Financial Market (Khedhiri & Muhammad, 2008; Moustafa, 2004), c) all companies listed on the Abu Dhabi Securities Markets (ADSM) are required to publish IFRS financial statements since 2003 (Aljifri, 2008; Deloitte, 2007) and d) and because of availability of data. The UAE sample is selected from the period 2001-2008 based on following criteria. The number of companies selected was based on several criteria. First, since this study investigates the effects of accounting reform on value relevance of accounting information. It was necessary to have companies in existence both before and after the reform in order to examine the effect of the reform on the value relevance of accounting information. Therefore, companies that were listed just before or just after the reform were excluded. Second, for most companies in UAE the fiscal year ends of December. Since it was necessary to have common period for the calculation of stock returns accumulation across all the sample companies, whose fiscal years ended at some time other than December were excluded from the sample. Pursuant to the application of these selection criteria,, the final samples for UAE consisted of 136 firm-year observations for price model(17 companies for 8 years) and 119 firm-year observations for return model and also portfolio approach (17 companies for 7 years). 3. Research Findings 3.1. Descriptive Statistics Table 1 provides descriptive statistics for all the variables used in the regression analyses of UAE Data. The average per share market value of equity is 5.25UD for eight-year period with mean yearly standard deviation of 4.49UD. This show Investor obtained an average annual 0.362 market return during this seven -year period with an annual mean standard deviation of 1.04. The sample shows the high standard deviation in the dataset, which confirms the variability of firm’s size and industry classification traded in the Abu Dhabi stock market. Panel b and c show this situation was worse in the pre-reform period. Comparing standard deviations EPS, CFP and BVP show BVP has less standard deviation than the mean and others variables. It means better distribution than the other. International Journal of Economics and Financial Issues, Vol. 1, No. 2, 2011, pp.33-45 38 Table 1 Descriptive Statistics Name of variables N mean Std. Dev. median Panel A: Full Sample (2001,2-2008) P3 (Market price per share of firm ) 136 5.25 4.49 3.945 EPS (Earning per share) 136 .39 .43 .26 BVP (Book value of equity-per share) 136 2.73 2.46 1.98 CFP (cash flow per share) 136 .344 .93 .2 R (annual return ) 119 .362 1.04 .145 EPS/P (Earning per share / price) 119 .078 .057 .069 ∆EPS(change annual earnings per share) 119 .016 .063 .0127 Panel B: Before reform P3 (Market price per share of firm ) 34 2.26 1.42 2.08 EPS (Earning per share) 34 0.16 0.15 0.13 BVP (Book value of equity-per share) 34 1.38 1.11 1.11 CFP (cash flow per share) 34 0.28 0.39 0.14 R (annual return ) 17 0.11 0.18 0.09 EPS/P (Earning per share / price) 17 0.06 0.03 0.07 ∆EPS(change annual earnings per share) 17 0.00 0.04 0.00 Panel C: After reform P3 (Market price per share of firm ) 102 6.25 4.73 5.37 EPS (Earning per share) 102 0.47 0.47 0.31 BVP (Book value of equity-per share) 102 3.19 2.62 2.41 CFP (cash flow per share) 102 0.36 1.05 0.24 R (annual return ) 102 0.34 0.81 0.21 EPS/P (Earning per share / price) 102 0.08 0.06 0.07 ∆EPS(change annual earnings per share) 102 0.02 0.07 0.01 *All data are based on UAE’s dirham (UD) 3.2. The Inferential Findings As mentioned earlier, the objectives of this study are to examine value relevance of accounting information, and to compare the value relevance between two regimes in two periods. To operationalize value relevance of accounting information, two empirical valuation approaches are employed: the regression-variations approach and the portfolio return approach. Because these two approaches together provide different perspectives on the issue of value relevance of accounting information. 3.2.1 Regression-Variations Approach Result of coefficient test (redundant variables test and omitted variable test) for UAE suggests price model with two variables (see below of Table 2). Redundant variables test suggests the dropping of CFP variable from model with three variables (.1671>.05). Result of omitted variable test does not advise adding CFP variable to price model with two variable to increases the explanatory power of the model (.4245<.05). The first panel of Table 2 shows that the R2 for the price model specification is 76.6% for the total sample and just coefficient of EPS is statistically significant. Comparison of coefficients indicates that EPS of 4 has a higher explanatory power than any other variable. Therefore, according to price model accounting information in the Abu Dhabi Securities Market (ADSM) is value relevant. A comparison of the two results for before and after reform based on price model, demonstrates that the explanatory power (R2 ) for the period before reform is more than the period after reform. It means value relevance of accounting numbers decreased in the period after reform. Consequently, the result indicates reform in accounting standards did not improve relevancy of accounting numbers in Abu Dhabi Securities Market. In panel B of Table 2 provides the results of the return model. Explanatory power (R2 ) for the return model specification is 30.3% for the total sample. Therefore, according to these results it can be concluded that EPS level and changes EPS information in Abu Dhabi Securities Market are relevant for investors in their decision making. A comparison of explanatory power (R2 ) accounting numbers for the return model indicates decreasing of that in the period (2003-2008), after Value relevance of accounting information in the United Arab Emirates 39 reform in accounting standards. So, the result of the return model also indicates reform in accounting standards did not improve relevancy of accounting numbers in Abu Dhabi Securities Market. Table 2 Result of Regression-Variations Approach Panel A: Price Model Years pit=ß0+ß1bvpit+ß2epsit+eit pit=ß0+ß1bvpit+ß2epsit+ ß3cfpit+eit ß0 ß1 ß2 R2 N ß0 ß1 ß2 ß3 R2 2001- 08 t-st. 2.97 .22 4 .766 136 2.8 .22 4.1 .41 .77 3.4*** .69 7.8*** 3.38*** .7 8.6*** 2.9*** 2001- 02 t-st. .71 .19 7.7 .875 34 .68 .3 7.4 -.28 .90 6.7*** 2.2** 44*** 7*** 5.2*** 14*** -7*** 2003-08 t-st. 2.6 .06 5.6 .45 144 2.59 .02 5.4 .81 .51 5.5*** .49 15*** 6.2*** -.23 15*** 3.9*** Panel B: Return Model Years Rit= ß0+ß1epsit/pit-1+ß2(epsit- epsit-1)/pit-1 +eit ß0 ß1 ß2 R2 N Coefficient Tests of CFP Prob.f Redundant Variables .1671 Omitted Variables .4245 2001-08 t-st. .03 2.4 3.7 .303 119 .17 1.74** 2.11** 2002 t-st -.08 3.2 -.64 .302 17 -.9 2.34** -.63 2003-08 t-st .12 1.5 5.3 .282 102 .4 .66 1.73* Notes: ***, **, * indicates significance at 0.01, 0.05 and 0.10 levels T-statistics based on White heteroscedasticity-consistent standard errors. *for full sample of return model is used GLS with Cross Section Weight * For full sample of both price model are used GLS with Fixed cross section and for sub-samples of price model are used GLS with Cross Section Weight. 3.2.2 Portfolio-Returns Approach Panel A (second column) of table 3 presents results for each year in the investigated period, the mean market-adjusted return on each accounting hedge portfolio (%). The value 19.4 in below ∆EARN for year 2002 means person could earn 19.4 percent net market-adjusted (long position minus short position) in year 2002 if sign of earning changes was used to construct a portfolio. Since this is more than zero it can be concluded that earning changes is relevant for investors to make wellinformed decisions. A comparison of these numbers, ∆EARN (19.4%), ∆ROE (15.1%) and ∆CFP (- 4.4%) for year 2002 shows that cash flow information isn’t relevant for investors in making investment decisions while earnings and ROE information are relevant for investors. This also indicates present earning with (19.4%) is more relevant than the ROE with (15.1%). The value 58.1 under ∆EARN for year 2002 as % mkt ratio indicate that about 58.1% of the total perfect foresight returns are available to investors with advance knowledge of the sign of the earnings change. Panel B of table 3 reveals mean market-adjusted returns on accounting hedge portfolio (%) and that a proportion of the total hedge portfolio market-adjusted returns can be earned by the perknowledge of the accounting information (%mkt) for the investigated period. The results in column of based on the sign; clearly demonstrate that foreknowledge of information in the financial statements would be highly relevant for investors. Investment strategies based on a preview of the sign of the change in ROE would earn an average market-adjusted return throughout the sample period of about 30.1%, compared with 17.4% for the ∆EARN portfolio and 3.9% for the ∆CASH portfolio. On the other word, all the accounting measures seem to be value-relevant to investors. International Journal of Economics and Financial Issues, Vol. 1, No. 2, 2011, pp.33-45 40 The results in second and third line under sign and magnitude (panel B) indicate that accounting information are value-relevant in both period before (2002) and after reform (2003-2008) in Abu Dhabi Securities Market (ADSM). In first period value relevance of SIGN_∆EARN is more than the others while in second period SIGN_∆ROE information is more relevant than others. A comparison of result of SIGN_∆EARN shows that value relevance of accounting information has decreases in Abu Dhabi Securities Market stock exchange after accounting reform in this market. While the results based on SIGN-CASH and SIGN_∆ROE show increase in value relevance for the period after reform. Panel A (first column) of Table 3 shows, for each year in the investigated period, the mean market-adjusted return on each accounting hedge portfolio (%). The value 33.5 under ∆EARN column for year 2002 means person could earn 33.5 percent net market-adjusted return (long position minus short position) based on sign and magnitude of earning changes. Since this is more than zero we can conclude earning information is relevant for investors on the Abu Dhabi Securities Market (ADSM) at year 2002. A comparison of numbers, ∆EARN (33.5 %), ∆ROE (21.8%) and ∆CFP (-2.2%) in first line of panel A of Table 3 for year 2002 show that ∆EARN (33.5%) are more relevant than any others variable for investors. They also show present earning and ROE with 33.5% and 21.8% are more relevant than the cash flow with (-2.2%). The value 92.1 under ∆EARN for year 2002 as %mkt ratio indicates that about 92.1 % of the total market adjusted returns are available to investors with advance knowledge of the sign and magnitude the earnings change. A comparison of the numbers in line for year 2002 demonstrate that earnings and ROE changes are relevant while cash flow is not value relevance for investors in making decision. Table 3 Portfolio-Returns Approach Panel A: Mean market-adjusted returns on accounting hedge portfolio (%) and proportion of the total hedge portfolio market-adjusted returns can be earned by the per-knowledge of accounting information(%mkt)2002- 2008. Year Based on Sign & Magnitude Based on Sing ∆EARN ∆ROE ∆CFP ∆EARN ∆ROE ∆CFP % %mkt % %mkt % %mkt % %mkt % %mkt % %mkt 2002 33.5 92.1 21.8 52.3 -2.2 -5.4 19.4 58.1 15.1 45.1 -4.4 -13.3 2003 10.9 27.7 24.7 62.9 -4.2 -10.7 21.5 64.1 21.5 64.1 -7.3 -21.7 2004 127.3 67.0 126.1 66.4 -18.4 -9.7 -34.8 -22.6 114. 74.0 -11.1 -7.2 2005 19.5 22.4 31.0 35.7 11.1 12.8 30.5 42.4 -10.7 -14.8 -3.2 -4.5 2006 2.3 5.8 -4.6 -11.4 5.4 13.3 0.8 2.4 12.6 37.9 2.2 6.7 2007 -16.8 -15.4 8.7 7.9 -53.9 -49.4 49.4 49.2 46.5 46.3 -45.9 -45.8 2008 -5.3 -12.6 14.4 34.0 25.6 60.7 -3.3 -9.5 1.2 3.5 25.0 72.2 Panel B: Mean market-adjusted returns on accounting hedge portfolio (%) and proportion of the total hedge portfolio market-adjusted returns can be earned by the per-knowledge of accounting information (average for full sample, before and after reform) Year Based on Sign Based on Sing & Magnitude ∆EARN ∆ROE ∆CFP ∆EARN ∆ROE ∆CFP % %mkt % %mkt % %mkt % %mkt % %mkt % %mkt 2002-08 27.6 30.7 31.9 35.9 3.9 11.4 17.4 30.9 30.1 38.7 3.9 11.3 2002 33.5 92.1 18.4 44.2 0.3 0.9 19.4 58.1 15.1 45.1 0.0 0.0 2003-08 26.7 20.5 34.1 34.5 4.5 13.2 17.0 26.4 32.6 37.6 4.5 13.2 Panel B of Table 3 shows mean market-adjusted returns on accounting hedge portfolio (%) and proportion of the total hedge portfolio market-adjusted returns can be earned by the perknowledge of accounting information (%mkt) for the investigated period. The results in column based on the sign and magnitude, clearly demonstrate that foreknowledge of information in the financial