THE VALIDITY OF TRADITIONAL AND VALUE BASED MEASURES IN EXPLAINING EQUITY PRICES IN THE EMERGING STOCK MARKET OF SRI LANKA
Abstract
Capital Market Based Accounting Researches (CMBAR) have been very much popular since late 60s. However,most of the studies were based on developed capital markets like US, UK and Australia. On the other hand, most of them were conducted on traditional accounting measures (TAMs) based valuation model like Ohlson (1995) model. However, the current researchers of accounting and finance field use TAMs as well as Value Based Measures (VBMs) such as Economic Value Added (EVA) and Market Value Added (MVA) for explaining Stock Prices(SPs). Thus this study addresses how far TAMs and VBMs are capable in explaining equity prices. The study contributes to the literature as the first widespread comprehensive study of the validity of TAMs and VBMs in determining stock prices in Sri Lanka.. The main objective of the study is to compare the explanatory power of TAMs and VBMs. TAMs include Earnings per share (EPS), Cash Flows(CFs) and Book Value per Share (BVPS). VBMs include EVA and MVA in explaining stock prices (SPs). The study includes Manufacturing,Diversified holding and Beverage, Food and Tobacco companies listed in the Colombo Stock Exchange (CSE),selected on the basis of market capitalization and the data availability from 2003 to 2008. The Ordinary Least Square Regression (OLS) and Karl Pearson correlation coefficient were applied to analyze data. The study found that the OE is the most significant explanatary variable in explaining SP. Although the BVPS, Investing Cash Flows(ICF) and MVA are also significant variables for determining SPs as suggested by Stepwise regression, EVA is not a significant variable. The results indicate that the TAMs are still at the top in determining SPs. The standard setting bodies should streamline the format of financial statements to represent the investors’ information requirements.
Key Words: Traditional Accounting Measures, Value Based Measures, Stock Prices
