Value Relevance of Accounting Information on Investors’ Decisions: Evidence from the Listed Companies in Sri Lanka

Abstract

Empirical evidence suggests that accounting information plays a vital role reflecting the share price and relevance of accounting information is a crucial prerequisite for stock market growth. However, recently worldwide share markets had a turbulent period which brought value relevance of accounting information under severe criticisms. A number of researches in developed countries have created the impression that accounting numbers have lost their value relevance. Therefore, this paper investigates value relevance of accounting information on investors’ decisions in Sri Lanka. Further it examines the differences in the value relevance of accounting information across industries. Data for the study was obtained from the annual reports of a cross sectional sample of 50 companies representing Beverage, Food and Tobacco, Diversified Holdings, Hotels and Travel, Bank, Finance and Insurance and Manufacturing industrial sectors in Colombo Stock Exchange. The multiple regression analysis was applied to examine relevance of Earnings, Dividends, Book value, and Growth on share price in this study. The results suggest that there is a significant relationship between selected variables and share prices. Further the findings revealed that book value is the most significant value relevant variable whereas growth is non-value relevant in affecting investors’ decisions. Moreover, evidence suggests that there is no significant variation in value relevance among different industrial sectors except the growth and dividends. The evidence of this study indicates that accounting information still plays a significant role in investment decision making and stock market development.