Question

with a minimum of 5 journal articles examine the determinants of share prices in Ghana as compared to research in any developed country of your choice

Answer 1

The literature defines value relevance as the ability of accounting data to summarize and capture information that affects the market value of companies. The ability of financial statement information to capture or summarize information that affects share values is referred to as value relevance. In this case, prices of equity are used as the proxy for the value of a company. Thus, value relevance studies measure the usefulness of accounting information from the perspective of equity investors (Beisland, 2009).

The financial statement information is obtained from annual reports of companies, whereas the stock prices are obtained from the capital markets. Empirical studies into accounting information started with the pioneering work of Ball and Brown (1968). Their study instituted the tradition of empirical capital market research in accounting that continues to this day. They were the first to provide convincing scientific evidence that firms’ share returns respond to the information content of their financial statement. Since then, several studies have been conducted to test the relationship that accounting information bears to stock prices.

There are at least four sources of demand for capital market research in accounting that explains its popularity: (i) fundamental analysis and valuation; (ii) tests of capital market efficiency; (iii) role of accounting in contracts and in the political process; and (iv) disclosure regulation (Kothari, 2001). Three types of research are successively considered: (1) studies of the market reaction to the release of new accounting information that analyse the stock price impact of accounting disclosures in order to determine whether these are useful to market participants; (2) studies of the long-term association between stock returns and accounting ratios, which examine the extent to which the information conveyed by accounting figures is consistent with that reflected in stock prices; and (3) complementary studies devoted to the use of accounting data by investors and to the influence of market considerations on accounting choices (Dumontier, 2002).

The theoretical basis for the capital market research studies is premised on the theory of Efficient Capital Market (EMH). A capital market is said to be efficient when current prices fully reflect all available information (Ross, Westerfied, & Jordan, 2010). According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks at inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

Generally, accounting information plays a key role in stock prices. This implies that the accounting standard used would influence the accounting information presented on the financial statement of the companies, which would ultimately influence the investors’ decisions and consequently stock prices. In this vein, the adoption of international accounting standards and international financial reporting would influence the firm-specific information and their stock prices.

In Ghana, financial reporting was regulated by the Ghana Accounting Standards until 2007 when the Internal Accounting Standard was adopted. The Securities and Exchange Commission of Ghana regulates listed entities under the Stock Exchange Act (1971) and the Listing Regulations (1990). Listed companies are required to comply with SEC-Ghana’s financial reporting requirements.

Several studies have been conducted across developed economies to test whether adopting International Financial Reporting Standards (IFRS) improves accounting information quality and hence its ability to explain the value of a company. For example, Hung and Subramanyam (2004) studied the effects of International Accounting Reporting Standards adoption on financial statement preparation using Germany as a case study. Paananen (2008) also investigated how IFRS adoption affects accounting quality in Sweden. Armstrong, Barth, Jagolinzer, and Riedl (2010) investigated market reaction to IRFS in the European Union. Iatridis (2010) also examined IFRS adoption and quality of financial statement information in the UK.

Most of these studies were conducted in developed capital markets and in countries that had well-developed financial accounting reporting standards. Ghana’s capital market is quite different from the developed markets where most of the research was carried out. An assessment made by the international organization for securities commission found that Ghana’s capital market is too closed. Their assessment implies investors and capital market players do not have access to information. Bawumia, Owusu-Danso, and McIntyre (2008) observed that Ghana’s capital market was illiquid and underdeveloped, only few households participated in trading activities and that trading is concentrated on only a few securities. Again Ghana’s capital market is low in capitalization. The Ghana Stock Exchange has enjoyed a tax holiday, yet total capitalization of the stock market has not met the country’s expectation (Government of Ghana [GoG], 2012).

Ghana adopted IFRS in 2007 and this has provided research opportunities to investigate whether the IFRS adoption has led to an improvement in the quality of financial information, and consequently had a significant effect on the stock prices. The current study extends this line of enquiry into an emerging market, specifically Ghana Stock Exchange, to examine the effect of firm-specific information on the market price of stock after the adoption of IFRS