GLOBAL JOURNAL OF BUSINESS RESEARCH Volume 2 Number

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1 GLOBAL JOURNAL OF BUSINESS RESEARCH Volume 2 Number THE ASSOCIATION BETWEEN ACCOUNTING INFORMATION DISCLOSURE AND STOCK PRICE Hwe Cheng Wang, Alabama A&M Unversty Hsan-Jane Chang, Natonal Tape Unversty ABSTRACT Ths study examnes whether hgher nformaton dsclosure frms have hgher assocatons wth accountng returns (EPS) and stock prces based on the Ohlson (1995) model. Survey results on nformaton dsclosure and transparency of Tawan frms n 2004 were obtaned from the Tawan SEC. The results ndcate that frms wth hgh levels of nformaton dsclosure have a hgher assocaton between accountng earnng and stock market prce than frms wth low levels of nformaton dsclosure. In addton, the results provde evdence that there s a postvely sgnfcant relatonshp between book value and stock prce as well as between earnngs per share and stock prce JEL: G30, M41, M48, D82 INTRODUCTION E arnngs manpulaton by Enron, WorldCom, and AOL Tme Warner, has made market partcpants aware of fraudulent fnancal reportng. In addton, the Asa economc crss of 1997 caused the world pay attenton to executve offcer fraud. Thus, worldwde regulatng authortes proposed corporate governance and dsclosure regulaton to prevent a reoccurrence. The U.S. government set up Sarbanes-Oxley Act of 2002 (SOX) n order to renforce nvestment confdence and protect nvestors by mprovng the accuracy and relablty of corporate dsclosure. The Sarbanes-Oxley Act s the publc company accountng reform and nvestor protecton act wth the goal of preventng busness falures and fraudulent fnancal reportng. In contrast, the Tawan government proposed two methods to enhance corporate governance. Frst, t proposed to establsh an ndependent board system to enhance the polcy and procedures of corporate legtmacy and ratonalty. Second, t authorzes Securtes and Future Bureau (SFB) to ntate an nformaton dsclosure and transparency rankng system to ensure corporatons provde full and accurate nformaton dsclosure. Ths study utlzed SFB nformaton dsclosures and the system of transparency rankng as a proxy varable for nformaton transparency to examne whether the hgh nformaton dsclosure frms have hgher assocatons wth accountng earnngs (EPS) and stock prces then low nformaton dsclosure frms. Frms on the Tawan OTC market were dvded nto two groups utlzng the Ohlson model. One group of frms s classfed as hgher nformaton transparency frms and another group of frms s a lower nformaton transparency group. Ths classfcaton allows us to examne whether the frms wth hgh level(good) of nformaton dsclosure have a hgher assocaton between accountng earnngs (EPS) and stock market prce than frms wth low level (bad) of nformaton dsclosure. The remander of the paper s organzed as follows. In the next secton, we dscuss the relevant lterature and develop the test hypotheses. Next, we dscuss the methodology used n the emprcal examnaton. A dscusson of the data and test results follows. Fnally, the paper closes wth some concludng comments. 1

2 H.C. Wang, H.J. Chang Global Journal of Busness Research Vol. 2 No LITERATURE AND HYPOTHESIS DEVELOPMENT Collns, Maydew and Wess (1997) nvestgated systematc changes n the value-relevance of earnngs and book values over tme. The sample was selected form the perod They nvestgated the value-relevance of earnngs and book values over tme usng a valuaton framework provded by Ohlson (1995), whch expressed prce as a functon of both earnngs and book value of equty. They estmated yearly cross-sectonal regressons for a 41-year perod spannng 1953 to 1993 and use R 2 as the prmary metrc to measure value-relevance. Then, they used a technque descrbed n Thel (1971) and appled by Easton (1985) n order to compare the explanatory power that earnngs and book value had over prces. They decomposed the combned explanatory power of earnngs and book values nto three components: (1) the ncremental explanatory power of earnngs, (2) the ncremental explanatory power of book values, and (3) the explanatory power common to both earnngs and book values. The results showed that the value-relevance of bottom lne earnngs has declned over tme, havng been replaced by an ncreased value-relevance of book value. Verreccha (1983 and 1990) found that ncreasng nformaton dsclosure results n ncrease costs, when the stock prce of frm was understated. In order to reduce the nformaton asymmetry between managers and outsde nvestors, managers would lke to ncrease the nformaton dsclosure to ncrease the stock prce. Hearly and Palepu (1993) assumed that there was an nformaton asymmetry between managers and outsde nvestors. They posted that f there was dvergence n owners and manager s objectves, managers would make fnancal reportng decsons n ther own nterest, n whch case fnancal dsclosures mght not be relable. Sknner (1994) ponted out that when frm value s overstated, mangers would dsclose bad nformaton to reduce the cost of a lawsut. The dsclosure of bad nformaton s more relable then the dsclosure of good nformaton and can reduce lawsut costs. Sknner found that the frms mght ncrease nformaton transparency to mprove the frm value and solve agency problems. When the transacton cost s hgher, the nvestors who have nsde nformaton are lkely to use the nformaton to earn an abnormal return (Copeland and Gala (1983), Glosten, Mllgrom (1985) and Damond (1985)). In order to prevent nvestors from usng nsde nformaton to make profts and protect nvestors benefts, managers wll dsclose nformaton to nvestors. Thus under ths model, managers have ncentves to dsclosure the good and bad news. These results suggest that f a frm value s understated or overstated, managers would ncrease the nformaton transparency to reflect the reasonable frm value. Thus, ths study posts that when transparency of nformaton dsclosure ncreases the value of accountng nformaton ncreases, thus external nvestor can accurately assess the frm value. Ohlson (1995) developed and analyzed a model of a frm s market value as t relates to contemporaneous and future earnngs, book values, and dvdends. Ohlson (1995) found that equty accountng provde the underpnnngs of the model. The clean surplus relatonshp apples, and dvdends reduce current book value but do not affect current earnngs. Ohlson s model satsfed many appealng propertes, and t provded a useful benchmark when one conceptualzes how market value relates to accountng data and earnngs, book value, and dvdends. Thus, based on Ohlson s model we argue that market prce s assocated wth accountng earnng and book value. Therefore, from Ohlson (1995) model and the above lterature revews we post that: Hypothess 1: Frms wth hgh levels (good) of nformaton dsclosure have a hgher assocaton between accountng earnng (EPS) and stock market prce than the frms wth low levels (bad) of nformaton dsclosure 2

3 GLOBAL JOURNAL OF BUSINESS RESEARCH Volume 2 Number METHODOLOGY Measurement Ths study utlzed Ohlson s (1995) model as the research bass, employed the SFB (Securtes and Future Bureau) nformaton dsclosure and transparency rankng system and used publc frms or OTC frms as the nonaccountng nformaton to form the research model of ths study as follows: P Where: = C + β PERBV + β EPS + β DIS + β TYPE + β DIS * PERBV + β DIS * EPS + ε (1) P s the market value, or prce, of frm s equty PERBV : book value for frm EPS : earnng per share for frm DIS : dsclosure level for frm Ds = 1 presents for one thrd of sample frms are n the hgh level of dsclosure group. Ds = 0 presents for two thrd of sample frms are n the low level of dsclosure group. TYPE : TYPE=1 presents for Tawan Securty Exchange (TSE) and TYPE=0 presents for Tawan OTC market (OTC) DIS * PERBV :dsclosure level nteracton wth book value for frm DIS * EPS :dsclosure level nteracton wth earnng per share o for frm ε :the resdual term for frm The sample was dvded nto two groups, one group wth hgh level of dsclosure and second group wth low level of dsclosure based on our survey questons. One-thrd of sample frms are n the hgh level of dsclosure group, and the remanng two thrd of sample frms are n the low level of dsclosure group. Ths study focuses on the dsclosure level nteracton wth earnngs per share and book value on frm. Dsclosure level nteracton wth earnng per share presents the dfference n the explanaton power between hgh dsclosure level of earnngs and low dsclosure level of earnngs on frm. Ths study examnes whether earnngs per share and book value of the hgh dsclosure level frms can explan abnormal returns by testng the dsclosure level nteracton wth earnng per share and book value. If the results show a postvely sgnfcant dfference, t ndcates that hgh dsclosure level frms have hgher EPS and book value than low dsclosure level frms. Ths mples that the accountng dsclosure level does help decson makers and nvestors to make correct decsons. Varables We used one dependent varable and seven ndependent varables to test our hypotheses. The dependent varable s stock prce, whch s the closng prce of the sample frms on 3/31/2004. Seven ndependent varables were ncorporated nto the regressons as follows: Book value (PERBV): PERBV s the total asset/outstandng shares at the end of year. Ohlson Model (1995) develops and analyzes a model of a frm s market value as t relates to contemporaneous and future earnngs, book values, and dvdends. Therefore, we post that the market value at the end of year s postve relatve to book value. 3

4 H.C. Wang, H.J. Chang Global Journal of Busness Research Vol. 2 No Earnngs per Share (EPS): EPS denotes (net ncome from contnung operaton/ weghted average of outstandng shares)/ at the begnnng of market prce. Dsclosure level (DIS): The Sample was dvded by 2 sample groups, one group wth hgh level of dsclosure and second group wth low level of dsclosure based on our survey questons. One thrd of sample frms are n the hgh level of dsclosure group, and the remanng two thrd of sample frms are n the low level of dsclosure group. Ds equal 1 presents for one thrd of sample frms are n the hgh level of dsclosure group. Ds equal 0 presents for two thrd of sample frms are n the low level of dsclosure group. TYPE: TYPE=1 presents for Tawan Securty Exchange (TSE), TYPE=0 presents for Tawan OTC market (OTC) DIS * PERBV : Dsclosure level nteracton wth book value. DIS * EPS : Dsclosure level nteracton wth earnngs per share. ε t :The resdual term Grand (1980) found that the annual earnngs announcements of OTC frms appear to possess more nformaton content than those of the NYSE frms. Grand ponted out that OTC nvestors apparently have fewer alternatve sources from whch to acqure nformaton on frms pror to the release of the annual earnngs number. Therefore, when the announcement s made, the market reacton to the nformaton contaned n the report may be sgnfcant. Grand assessed the dfferences n the nformaton content of annual earnngs announcements between a sample of OTC frms and a sample of NYSE frms. Snce the stock market n Tawan s smlar to n U.S. We predct, n a smlar fashon, that there s also a sgnfcant dfference of earnng coeffcent between OTC frms and TSE frms n Tawan. SAMPLE AND DATA COLLECTION To enhance corporate governance, the Tawan government proposed two regulatory approaches. Tawan government n 2004 authorzes the Securtes and Future Bureau (SFB) to mplement an nformaton dsclosure and transparency rankng system to ensure that corporatons provde full and accurate dsclosure. The system was desgned by seven famous academc professors and ndustry experts. The purpose of the nformaton dsclosure and transparency rankng system s to ncrease nformaton transparency and to help nvestors and decson makers. The evaluaton ndcators of ths system are based on voluntary and mandatory dsclosures. The evaluaton ndcator classfed fve major evaluators based on 88 questons. The survey questons were desgned to requre ether a yes or no response. Ths study employed SFB nformaton dsclosure and transparency rankng system results as a proxy varable for nformaton transparency. In 2004, there were 611 publc frms on the Tawan Securty Exchange (TSE) and 308 sample of frms on OTC. The government requred all of publc frms n TSE and OTC to be SFB evaluated wth a few exceptons ncludng the followng: non-tse Frms, OTC over one year due to nformaton s nsuffcency and frms that change from one stock exchange to the other. The sample group ncluded 205 hgh dsclosure frms from the TSE market and 97 hgh dsclosure frms from the OTC. Snce ths study needs to calculate the beta coeffcent as the control varable, t needs at least 24 months n the 4

5 GLOBAL JOURNAL OF BUSINESS RESEARCH Volume 2 Number estmaton perod. The fnal sample ncluded 662 frms. We classfed the sample nto two groups, one group s hgh dsclosure frms wth one thrd of total sample and another group as low dsclosure frms two thrd of the total sample. Table 1 show frequency statstcs for our sample. Table 1: the Dstrbuton of Sample Frms Hgh Dsclosure Level Low Dsclosure Level Subtotal OTC Market TSE market Total Ths table shows frequency statstcs for the sample. Table 2 shows the dstrbuton of sample frms by ndustry and dsclosure level. The frst column ndcates the number of frms. The second column ndcates the percentage of the total sample represented by each group. ANALYSIS AND PRESENTATION OF FINDING Descrptve Statstcs Table 3 presents the descrptve statstcs for the sample. Table 3 presents the mean, medan, mnmum, maxmum, and standard devaton for the dependent varables and ndependent varables, whch nclude PRICE, PERBV, EPS, DIS, and TYPE. Mean and medan of PRICE durng the perod 1993 are $ and respectvely. Mean and medan of PERBV durng the perod 1993 are $ and respectvely. Mean and medan of EPS durng the perod 1993 are $ and 0.72 respectvely. Mean of DIS durng the perod 1993 s $ Mean of TYPE durng the perod 1993 s $ Examnng the Exstence of Multcollnearty Multcollnearty between ndependent varables causes large varances and covarance for the estmators of the regresson coeffcents, whch makes dffcult to dstngush ther relatve nfluences. Ths problem was tested by dervng the correlaton coeffcent matrx. Table 4 shows the results. The correlatons between varables were computed by usng Pearson Correlaton Coeffcents. The correlaton matrx n Table 4 shows that the strongest correlaton coeffcent was between frm PRICE and EPS. The second hghest correlaton coeffcent was between frm PRICE and PERBV. Gujarat (1988) suggests that smple correlatons between ndependent varables should not be consdered harmful unless they exceed 0.80 or The Pearson correlaton coeffcent (reported n Table 4) suggests that multcollnearty s not severe for the ndependent varables n ths study. 5

6 H.C. Wang, H.J. Chang Global Journal of Busness Research Vol. 2 No Table 2: Frequency Statstcs for Sample Company Industry Dstrbuton Low Dsclosure Level Hgh Dsclosure level Dsclosure level rato subtotal Industry No(a) Percentage No(b) Percentage chemcal % % 25.64% 39 cement % % 37.50% 8 retal and % % 23.08% 13 other % % 16.33% 49 Glass % % 16.67% 6 food % % 37.50% 24 textle % % 27.78% 54 paper % % 28.57% 7 Plastc % % 60.00% 25 computer % % 40.15% 264 transportaton % % 15.00% 20 transportaton % % 50.00% 4 cable % % 6.67% 15 commodty % % 0.00% 1 Plastc tre % % 44.44% 9 Electrc % % 20.00% 35 steel % % 24.14% 29 constructon % % 11.76% 51 entertanment % % 0.00% 9 Total % % 30.51% 662 Ths table shows the frequency statstcs. The hgh dsclosure ndustres nclude plastc (60%), transportaton tool (50%) and plastc tre (44.44%); the low dsclosure ndustres ncluded entertanment (0%), commodty (0%) and cable (6.67%) Table 3 Descrptve Statstcs Varable Mean Medan Maxmum Mnmum Standard Devaton Dependent Varables PRICE Independent Varables PERBV EPS DIS TYPE P : the market value, or prce, of the frm s equty, DIS: dsclosure level,1 presents for one thrd of sample frms are n the hgh level of dsclosure group; 0 presents for two thrd of sample frms are n the low level of dsclosure group. TYPE: 1: publc company TSE; 0: OTC ; PERBV: book value per share; EPS: earnngs per share Table 4 : Pearson Corrélaton Coeffcent Matrx Varables PRICE PERBV DIS TYPE EPS PERBV 0.747** DIS 0.219** 0.267** TYPE 0.144** 0.192** EPS 0.758** 0.736** 0.196** 0.159** *, and ** ndcate correlaton s sgnfcant at the 0.05 and.01 level (2-taled) respectvely. 6

7 GLOBAL JOURNAL OF BUSINESS RESEARCH Volume 2 Number Analyss of Regresson Effects To test our predctons, we use one-year cross-sectonal dfferences n dsclosure levels. From the Ohlson model regresson, we fnd that the full model explanatory power s 73.55% and the F value s , ndcatng that the model has very good explanatory power. Table 5 shows the results of the regresson model used n ths study. The book value (PERBV) analyss (β=0.8121, t= , p<.001) shows that stock prce s postvely and sgnfcantly assocated wth book value. The dsclosure level nteracton wth book value (DIS*PERBV) analyss (β = , t = , p>0.1) shows that dsclosure level nteracton wth book value s negatvely and nsgnfcantly assocated wth stock prce. Table 5: Results of Regresson Equatons Model Varable Predct Sgn Coeffcent Standard Devaton T Value b C PERBV *** DIS*PERBV EPS *** DIS*EPS ** DIS TYPE R-squared Adjusted R-squared F-statstc Prob(F-statstc) 0 a n = 662, b Beta weghts and -values reflect results for the full model ;When the predcted sgn s ether (+) or (-), then the value s a one-taled test; when the predcted sgn s (?), then the value s from a two-taled test. p :the market value, or prce, of the frm s equty DIS: dsclosure level,1 presents for one thrd of sample frms are n the hgh level of dsclosure group; 0 presents for two thrd of sample frms are n the low level of dsclosure group. TYPE: 1: publc company n TSE; 0: OTC ; PERBV: book value per share; EPS: earnngs per share. The earnngs per share (EPS) analyss (β =6.8162, t = , p<.001) shows that earnng per share s postvely and sgnfcantly assocated wth stock prce. The results of the nteracton term (DIS*EPS) nvolve both dsclosure level and earnngs per share (β =4.1537, t = , p<.01), whch s found to be postvely sgnfcant. Thus, the results support the hypothess that dsclosure level postvely moderates the relatonshp between earnngs per share and stock prce. The fact that dsclosure level nteracton wth earnng per share s postvely assocated wth stock prce suggests that nvestors need to be partcularly concerned about frms wth hgher dsclosure levels. Ths stuaton produces nteracton effects that ncrease earnngs per share and ncrease the explanatory power of the stock prce. The dsclosure level (DIS) analyss (β = , t = , p>0.01) demonstrated that dsclosure level s negatvely and nsgnfcantly assocated wth stock prce. The (TYPE) analyss (β = , t = , p>.01) shows that type s negatvely and nsgnfcantly assocated wth stock prce. Thus, the results demonstrated that the stock exchange where the frm s lsted does not result n a dfferent stock prce. CONCLUSIONS To enhance corporate governance the Tawan government authorzed the Securtes and Future Bureau (SFB) to set up an nformaton dsclosure and transparency rankng system n We examne whether the hgher nformaton dsclosure frms have a hgher assocaton wth accountng earnngs (EPS) and stock prce based on the Ohlson model(1995). The results ndcate that the frms wth a hgh level of nformaton dsclosure have a hgher assocaton between accountng earnngs (EPS) and stock market prce than the frms wth low levels of nformaton dsclosure. In addton, the results ndcate that there 7

8 H.C. Wang, H.J. Chang Global Journal of Busness Research Vol. 2 No s a postvely sgnfcant relatonshp between book value and stock prces. Furthermore, we found that there s a postvely sgnfcant assocaton between earnngs per share and stock prce. We concluded that the frms that ncrease nformaton dsclosure transparency can ncrease accountng earnngs; thereby, ncreasng stock market prce. The paper s subject to one prmary lmtaton. That s, the SFB data does not dsclose a frms score. Rather t provdes a dummy varable ndcatng a dsclosure classfcaton. Had the data ncluded the company score, addtonal nformaton could be gleaned from the analyss. Future research can extend the analyss of the SFB data for longer perods of tme to make the results more generalzeable. Future researchers mght also test the relatonshp between nformaton dsclosure and earnngs management. REFERENCES Amr, E.,and, B.Lev (1996). Value-Relevance of Non-Fnancal Informaton:The Wreless Communcatons Industry. Journal of Accountng and Economcs 22:3-30. Atase, R., (1987). Market Implcatons of Predsclosure Informaton: Sze and Exchange Effects. Journal of Accountng Research 25: Barth, M., Beaver, W. Landsman, and R.Wayne. (1998). Relatve valuaton Roles of Equty Book Value and Net Income as a Functon of Fnancal Health. Journal of Accountng & Economcs 25:1-34. Barth, M., Beaver, W., Landsman, W., (2001). Comments on the Relevance of the Value-Relevance Lterature for.fnancal Accountng Standard Settng. Journal of Accountng and Economcs 31: Botosan, C., and M. Plumlee. (2002). A Re-examnaton of Dsclosure Level and The Expected Cost of Equty Captal. Journal of Accountng Research 40: Bostsan, C., and M. Harrs. (2000). The Cross-Sectonal Determnants of Dsclosure Tmelness: An Examnaton of Quarterly Segment Dsclosures. Journal of Accountng Research 38: Collns, D., S. Kothar, and J. Rayburn. (1987). Frm Sze and the Informaton Content of Prces wth Respect to Earnngs. Journal of Accountng and Economcs 9: Collns, D., E. Maydew, and Wess. (1997). Changes n The Value-Relevance of Earnngs and Book Values Over The Past Forty Years. Journal of Accountng and Economcs 24: Collns, D., and S. Kothar. (1989.) An analyss of Interpemproal and Cross-Sectonal Determnants of Earnngs Response Coeffcents. Journal of Accountng and Economcs 11: Copeland, T. E., and D. Gala. (1983). Informaton Effects on the Bd-Ask Spread The Journal of Fnance 38: Cho, S.K., and D.C. Jeter. (1992). The Effects of Qualfed Audt Opnons on Earnngs Response Coeffcents. Journal of Accountng and Economcs 15: Darrough, M. N., and N. M. Stoughton. (1990). Fnancal Dsclosure Polcy n an Entry Game Journal of Accountng & Economcs 12: Damond, D. W., and R.E. Verreccha. (1991). Dsclosure, Lqudty, and The Cost of Captal. The Journal of Fnance 46:

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