The Value Relevance of Accounting Information: An Empirical Analysis of Banking Sector of Pakistan

Abstract

Accounting Information contained in financial statements is relevant & reliable enough to present an indication of a business performance and financial condition to decision makers including investors.  This study attempts to address the value relevance of accounting information in investor’s decisions in Pakistani stock market. The relevance of accounting information is measured via correlation coefficient between average share price and cluster analysis is used to investigate the value relevance of large size firms and small size banks, further more incremental analysis and redundant variable test is also performed to check out the contribution of each variable in the model. Selective accounting information measures such as earning per share, equity, operational profit, size and age of firm, economic growth and non-traditional activities. Data set in this study consists of accounting information from published financial statements of commercial banks listed at Karachi Stock Exchange for a period of 6 years from 2007 to 2012.  The result shows that there is a strong relationship between accounting information and average share price. The most important value relevant variables are EPS, firm size and operational profit. The investors consider these instruments for investment decisions. All these variables are significant and value relevant. Hence, accounting information is value relevant in Pakistani financial market.