Exploring the empirical relationship between accounting disclosure and market returns in the GCC countries Introduction In today’s dynamic and global economy, several businesses, especially those that trade on stock markets, operate under the ownership of numerous investors around the world…
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The rapid advances in technology and communication have provided instant access of news on companies and capital markets to investors through mediums such as the Internet and television (Mayer, 2003). Thus, information is now analyzed by investors in a matter of minutes or seconds and decisions on stock investments are taken much more frequently. Companies disclose information on their performance or other aspects through various mediums such as earnings reports, corporate communications and management interviews (Weston, 2009). The investor base is constantly on the lookout for any new information from such events that may help them increase their returns or reduce their risk exposure (Schillhofer, 2008). Based on these factors, it is believed that an empirical relationship exists between accounting disclosures of firms and the performance of related stocks in the market. The paper analyzes the potential existence of such an empirical relationship among companies within the Gulf Cooperation Council (GCC) region by using a numerical analysis on historical information on related parameters. Schillhofer (2008) has shown that earnings disclosures have a direct influence on investor preferences that determine the prices and returns from traded securities. Since then, numerous studies have been carried out to understand the relationship between corporate disclosures and the performances of securities related to the target firms. While this strong relationship is demonstrated among firms based in the developed and western economies, behavior demonstrating the relationship between accounting disclosures and stock returns is rather sparse and relatively unexplored among firms based in Oman and other countries belongings to the Gulf Cooperation Council (GCC). This paper is an attempt to provide some further investigation into this phenomenon with a specific focus on the firms based out of the GCC member countries. McCahery (2007) believes that research exploring the value of information disclosed through annual reports and other corporate disclosures for investment analysis and valuation purposed has been rather limited in nature. This however leads one to question the importance of accounting disclosures and why they are so avidly analyzed by investors. Hirschey (2009) have conducted elaborate surveys of investors and investment analysts and have arrived at a broad consensus over the relevance and importance of the target company’s financial statements, footnotes, Management discussions & analysis (MD & A) as well as the various accounting assumptions and estimates of the company. For example, the release of financial statements and accounts is followed by the annual general meeting (AGM), which in the opinion of Ang (2008) perhaps offers the only opportunity for investors to understand the company’s management, their behavior and their practices to improve the sustainability and prospects of the business. However, Heinrich (2006) conducted some analytical studies in this regard only to conclude that such meetings did not generally evoke a collective and unilateral reaction from the market. According to Weston (2009), the extent of information available in the market about a company is directly related to the range of disclosures made public by the organization as well as the extent to which the company’s stock is followed by intermediaries such as financial analysts and brokers. Thus, most
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62 Pages(15500 words)Dissertation
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