value relevance of accounting numbers and the implications for international accounting standards harmonization: Evidence from Saudi Arabia and Kuwait

This study examines whether accounting standards or institutional factors are the prime determinants of differences in value relevance of accounting numbers across countries. The motivation for this study arises from ongoing accounting harmonization efforts to increase the comparability of financial reporting across countries. Proponents of harmonization agree that investors support the need for comparability. Opponents, on the other hand, argue that efforts toward a common set of accounting standards worldwide may not achieve comparability as long as economical, cultural, and political differences exist across countries. So, the question is whether the application of common accounting standards result in enhanced comparability of financial statements, given that firms operate in different countries with different regulatory and cultural influences. This study examines the relationship between reported financial figures and both stock prices and returns across Saudi, Kuwait, the U.S., and U.S. listed firms that use international accounting standards (IAS-sample) to determine whether there are differences in the value relevance of their accounting numbers. Saudi and Kuwait have similar environments. However, they use different GAAPs. Saudi uses U.S. GAAP and Kuwait uses IAS. As a benchmark, this study uses samples of firms that use U.S. GAAP, and that use IAS, with both samples listing in the U.S. capital market. To determine whether accounting standards play a large role in differences in value relevance across these countries, four comparisons are performed: (1) Saudi and the U.S.; (2) Kuwait and IAS-sample; (3) Saudi and Kuwait; and (4) the U.S. and IAS-sample. The results show that there are significant differences in the value relevance between countries that apply the same standards but have different institutional factors. On the other hand, there are no significant differences, in most cases, in the value relevance between countries that apply different standards but operate in a similar environment. Moreover, this study attempts to determine whether earnings conservatism differs across these countries. This study provides evidence that institutional factors affect the differences in earnings conservatism. The findings of this study suggest that international harmonization of accounting standards may not be easily accomplished because institutional factors play an influential role in information dissemination.