The Value Relevance of Accounting Information in Iraq

The paper tests the value relevance of accounting information extracted from financial statements of 15 Iraqi companies listed on the Iraq Stock Exchange (ISX) for period 2010–2020. The relationships among accounting information (measured as earnings, book value, and cash flows) and company value (measured as stock prices) have been analyzed via descriptive statistics, correlation and regression. It is found that all these relationships are positive and significant in different levels. Compared with book value, earnings have the highest influence on stock price, while cash flows have the lowest influence on stock price. This study participates in the understanding of value relevance of accounting information in ISX as an emerging market and presenting peer insights to enhance the financial reporting standards in this country and in other similar countries in Middle East region.

Introduction

To make informed and rational decisions, stakeholders need information from financial statements. The accounting information can be provided as fundamental for users of financial statements components to make their decisions. Currently, the company value as stock prices/returns can be reflected by the trend of the accounting information. The reflection of the accounting information in stock price is called as the value relevance of accounting information. It expresses the influence level of accounting information on stock price. Also, this relationship is an indicator of the truth, usefulness, and quality of financial statement components. Therefore, this paper pays attention to the value relevance of accounting information in ISX as an emerging market.

The value relevance of accounting information has been widely researched in developed countries, while the rarity of research concentrates on this field in developing countries, generally in the Middle East Region and particularly in Iraq. Iraq, with its unequaled economic and environmental regulations, presents an efficient issue in testing whether the accounting information is relevant or not. It is a fact that more than 90% of the Iraqi government revenues are essentially coming from oil exports. Within the last few decades, the Iraqi economy faced important political and economic changes. These changes make a different landscape of financial reporting. It is a needful to know how the market participants recognize and use accounting information in their investment decisions.

Iraq has experienced important political and economic transformations in recent periods. These transformations have impacted Iraqi financial markets. Currently, it is essential for policymakers and investors to understand the recognition and use of financial information. The objective of this study is to analyze the key accounting information relevance in the ISX and supplies ideas into how it can be improved to well avail the stakeholders needs.

This paper aims to examine the accounting information relevance in ISX. Focusing on Iraqi companies listed on ISX, it tends to examine the relationship between accounting information, namely earnings, book value, cash flows, and stock prices. As mentioned before and compared with the developed countries, the rare research on the accounting information relevance in developing countries is an existing fact. By treating this gap of the literature, this paper attempts to provide ideas on the accounting information advantages for Iraqi investors and provides references to generally enhance the standards of financial reporting and particularly improve the accounting information relevance in Iraq.

This study is organized into many sections. The next one surveys the research on the accounting information relevance internationally and territorially, with particular attention on Iraq. This is followed by the methodology section, which draws the lines of research design, data collection, sample selection, and data analysis techniques used in the study. The findings section presents the results of the empirical analysis, which are then discussed in the context of existing literature and the unique characteristics of the Iraqi market. Finally, the paper concludes with a summary of the findings, contributions to the literature, limitations, and suggestions for future research.

Literature Review

Value Relevance of Accounting Information Globally and Regionally

Since financial statements’ information does not clearly state the actual position of a company, thus making investment decisions that are influenced by stock price changes could not be strongly supported by this information. To locate a company value suitably, users may find other information disclosed by the company might be an alternative to financial statements’ information (Whisenant, 1997).

Therefore, to assist these users’ choices, pertinent or relevant information that supports them in making decisions might be extracted from the relationship between financial statements and stock price. This relationship has taken the place of the limitations of financial statement information. Currently, a great number of studies have examined this relationship in different areas of the world and concentrated on its significance and strength. A lot of studies are involved in investigating how accounting information can represent company value as it is estimated by financial statement users and reflected in stock prices (Barthet al., 2000). However, conflicting findings from the previous research have been deduced from examining the same accounting information.

Value relevance refers to the ability of financial statement information to capture and summarize firm value as reflected in stock prices. The concept is grounded in the theory that accounting information should be useful for making investment decisions, thus having a direct impact on a company’s market valuation. The first step in examining the value relevance of accounting information was in developed financial markets. The seminal work by Ball and Brown (1968) and subsequent studies by Ohlson (1995) and Feltham and Ohlson (1995) have laid the foundation for understanding the value and relevance of accounting information. These studies show that financial statements, especially earnings and book value, significantly influence stock prices.

Great numbers of empirical evidence related to the value relevance of accounting information are presented all over the world by many studies testing the Ohlson (1995) model in a simplified practical diversity that drives earnings and book values to fully interpret the most changes in stock prices. Amir and Lev (1996) showed that earnings and book value are broadly irrelevant in the industry sector valuation, examining the relationship between stock returns and earnings on one side and stock price and book value on the other side. Collinset al. (1997) proved that non-declining in value relevance of combined earnings and book value within the period 1953–1993 for industrial and services companies. In the same study, the ability of earnings to explain the changes in market values declined, while the explanatory power of book value was increased. Similarly, declining in earnings relevance and increasing in book value relevance have been found by other studies (Francis & Schipper, 1999), while a weak relationship between stock price and accounting information has been found by Lev and Zarowin (1999).

The extensive research on examining the value relevance of accounting information was in developed financial markets. it is found that earnings and book value are highly quality measures and useful predictors in explaining the changes of US and European stock prices (Barthet al., 2001; Collinset al., 1997). In those financial markets, the mentioned studies detected the important function of the accounting information relevance and dependable.

Few studies have examined the simultaneous impact of earnings, book value, and cash flows on stock price. It is found that the accounting information of 15 of the largest international oil and gas companies for the period from 1990 to 2003 highly explains changes in stock price (Misundet al., 2005). Other studies found similar results in India for the period from 1997 to 2006 (Vishnani & Shah, 2008) and in Iran for the period from 1996 to 2008 (Khanaghaet al., 2011). The results of the last study refer that earnings have greater power than book value and cash flows in explaining the changes in stock prices.

Due to the better performance of banking stocks, which has been marked in their returns, Sharmaet al. (2023) examined the impact of accounting variables on the stock prices of Indian banks and concluded that earning per share has an incremental impact on the prices of banking stocks.

It is found that the literature of value relevance concerning the relationships among different accounting variables and stock prices/returns has finite implications or conclusions to be used by interested users. Despite the confirmed and similar results of relevant and reliable accounting information in the literature, the models employed to conduct the value relevance of accounting information cannot differentiate between relevance and reliability (Azaret al., 2019).

Covering 90 empirical studies published from 1993 to 2016 in different countries in the world, the majority of these studies found the relevant accounting information in these countries before and after the adoption of IFRS (Bhatia & Mulenga, 2019). Few studies concluded the opposite results, and also other, studies did not find evidence for accounting information improvement after IFRS adoption (Bhatia & Mulenga, 2019 and Liu & Wang, 2023).

Barthet al. (2020) deduct the changing relationship between accounting information and its relevance to equity valuation over time. Their findings suggest that there has been a decline in the value relevance of accounting information over the years, particularly in the context of U.S. firms. The changes in accounting standards have had different effects on the value relevance of accounting information, with some standards enhancing relevance while others may have diminished it. Also, changes, such as the rise of technology firms and the shift towards a knowledge-based economy, have influenced how investors perceive and utilize accounting information.

Recent studies examine the quality of accounting information, aiming to explore the relationship between voluntary disclosure practices, the quality of earnings reported by firms, and the implications for the cost of capital. They conclude that firms with high-quality earnings and extensive voluntary disclosures typically experience a lower cost of capital. This is because investors perceive these firms as less risky, leading to a more favorable assessment of their financial health (Soderstrom & Sun, 2020; Franciset al., 2021; Kargin, 2022).

Data is extracted from annual reports of 1,272 companies listed on the A-share market in Shanghai and Shenzhen Stock Exchange in China for the period 2008–2018, and a stepwise regression model is employed to show the significant effects of accounting information on the stock price. It is found that the value relevance of earnings per share has a more significant influence on the market share price compared with other accounting variables (Rahman & Liu, 2021).

A study focusing on firms listed in the EU-28 and Western European countries during the global financial crisis found that cash flow variables such as cash holding levels positively impacted firm performance measured by return on equity (ROE). This suggests that efficient cash management policies enhance firm performance during economic downturns (Akgün & Memiş Karataş, 2023).

In Greece, Rompotis (2024) Investigates 80 non-financial companies listed on the Athens Exchange for the period 2018–2022. Financial performance and stock return are taken into consideration, while stock price is used as proxy for return risk. Other various variables include net cash flow, free cash flow, and cash flow from operating, investing, and financing activities. It was found that it is a positive sign for the relationship between financial performance and both net cash flow and free cash flow. While cash flow from operating activities showed a positive relationship with financial performance, investing and financing cash flows were negatively correlated with performance. Stock return and risk are not related to the cash flow management variables at all. This indicates that varied types of cash flows affect firm performance in different ways.

An examination of the value relevance of earnings and book value of equity for 54,421 firm-year observations is done for Indian listed firms for the period 1992–2016. The study found that the book value of equity is more relevant in loss-reporting and intangible-intensive firms compared to profit-reporting and non-intangible-intensive firms. This indicates that investors in intangible-intensive sectors place more emphasis on the book value of equity when evaluating firms that report losses (Kumari & Mishra, 2023).

Mixed findings have been recorded for examining the accounting information relevance in the Middle East region. Generally, earnings are relevant, while book value and cash flows show different levels of relevance in Saudi Arabia (Alsaeed, 2006) and the UAE (Al-Shammariet al., 2008). Those papers assert that when examining the accounting information relevance, there is a need to look at the regional features. Those features contain factors such, efficiency absence in the financial markets, investor sophistication lack and varying regulatory frameworks.

Oppositely, book value was the most value-relevant accounting information extracted by an empirical study on financial companies listed on the Amman Stock Exchange for the period from 2014 to 2018. Through that study, the book value of equity, among different accounting variables, had the largest impact on stock price, and its values can be helpful for supporting the decisions of market investors (Khader & Shanak, 2023).

Another study examines the impact of cash flows from operating, investment, and financial activities on stock returns. The examination model is linked by the control variable measured via firm size proxied by the volume of assets for 24 companies listed on the Palestine Stock Exchange. Focusing on operating cash flows, the study found that this variable has different significant results in accordance with low and high volumes of company assets. The study conclusions point out that market participators can depend on cash flows in making their investment decisions (Sabriet al., 2020).

Regarding the present study, research on developments of accounting information relevance in financial markets of developed countries and the Middle East region is not enough. It will be useful when it provides information about the accounting practices developments and the value relevance of accounting information in Iraq.

Research Developments of Accounting Information Relevance in Iraq

Iraq has experienced many challenges that influenced the research on the accounting information relevance. Those challenges were the important changes in the political, economic, and regulatory affairs that occurred in this country within more than the last five decades. Before 2003, when this country managed by a centralized economy through significant state control, government policies exist in opposition to the absence of accounting information transparency and relevance to investors. The Soviet-style system had largely impact on the accounting practices, reporting and standards. The focus of this system was on government regulations implementations more than on providing accounting information relevant to the external stakeholders.

The end of Saddam Hussein’s era in 2003 was the most important detour in the last 50 years. The new political regime attempts to rebuild the Iraqi economy to be ready to deal with accounting information relevance and reliability. Transformation and reformation processes after 2003 involved changing the regime, reforming regulations, and starting the adoption of IFRS. At the beginning of the post-2003, this country starts the first attempts to rebuild its financial and regulatory systems. New regulatory bodies and frameworks have been established to improve the overall environment of financial reporting. Adopting IFRS in the mid-2000s is considered a primary process to improve the financial statements quality and comparability and then to merge Iraq’s economy with the global one.

In the 2010s, Iraq really started to reform the accounting practices through many processes contained the partially adoption of IFRS (in banking sector and international operations companies), constructing the proper training and capacity, and reinforcement of regulatory. The partially adoption of IFRS leads to financial reporting inconsistencies. Many efforts were activated by Iraqi government and professional bodies, international organizations and accounting bodies to train Iraqi accountants and auditors on the new IFRS standards. Enforcing compliance with those new standards is supported by the government and professional bodies. Although these activities, enforcing consistent for IFRS adoption has not been completed due to political instability and limited resources.

Finally, the current developments of the 2020s comprise increased concentrating on transparency, advancements of technology, treating problems from continued challenges, and developments in sector-specific. The internal reforms and external pressures from international investors and organizations play the important role in the increased focus on transparency and accounting information relevance. The new technologies in accounting and auditing practices have been slowly adopted and began to have roots. Although the occurred progress, the important challenges have been remained. These challenges are political instability, economic fluctuations and the necessity of further improvements in regulatory and enforcement mechanisms. In sectors such as oil and gas, which drive the economy of this country, there has been a greater need for IFRS adoption and financial reporting quality enhancement for foreign investment attraction.

Few studies examined the accounting information relevance in Iraq. A study by Hamza and Hassan (2017) found that the value relevance of accounting information is affected by Iraq’s political instability and then consequently by the conditions of its unique economic that heavily depends on oil revenues. These factors may affect the reliability and transparency of financial reporting, thus impacting the perceived value relevance of accounting information.

Another study concludes that the value relevance of earnings and book value has increased separately. With additional details, the value relevance for earnings increased while it is irrelevant for book value when these variables are examined together in the stock price model. In the stock return model, this same study found that the value relevance of earnings has increased individually and simultaneously, while it has decreased for book value. That study shows that earnings values can significantly explain the changes in stock prices and returns compared with book value in Iraqi services companies (Shamki, 2022).

Methodology

The design of this research is quantitative approach using regression analysis to examine the relationship between accounting information and stock prices. The research follows a positivist paradigm, focusing on empirical evidence and statistical analysis to draw conclusions. The study’s data, of 660 firm-year observations, is collected from the annual financial statements of Iraqi companies listed on the ISX for the period 2010–2020. The sources of data include annual reports published by Iraqi companies, ISX publications, and other relevant financial databases.

The study’s sample consists of Iraqi companies selected from various sectors based on the availability of complete financial data for the study period. A balanced representation of different sectors to avoid sector-specific biases. Other companies with inconsistent or missing data are excluded. The dependent variable is stock prices (SP) measured at the end of the fiscal year. The independent variables are earnings per share (EPS) as net income divided by the number of outstanding shares, book value per share (BVPS) as equity divided by the number of outstanding shares, and cash flows per share (CFPS) as cash flows from operations divided by the number of outstanding shares. The statistical methods include (1) descriptive statistics that Summarize the sample data, including measures of central tendency (mean, median) and dispersion (standard deviation, range); (2) correlation analysis that examines the relationships between each independent variable and the dependent variable to assess multicollinearity: and (3) multiple regression analysis that Determine the value relevance of accounting information by analyzing the impact of EPS, BVPS, and CFPS on stock prices. The relations among these variables will be examined via the regression model as follows:

where β0 is the intercept, β1, β2 and β3 are the coefficients of the EPS, BVPS and CFPS, respectively, and ϵi is the error term. Other variables are defined before.

$$\begin{array}{r}SPi=\beta 0+\beta 1EPSi+\beta 2BVPSi+\beta 3CFPSi+ϵi\end{array}$$

Findings

The findings of the study are presented below, with tables and figures needed in the study to present the descriptive statistics, regression analysis results, and visualizations of the data.

Descriptive Statistics

The descriptive statistics provide an overview of the sample data, including the mean, median, standard deviation, and range for EPS, BVPS, CFPS, and SP, as illustrated in Table I.

Table I. Descriptive Statistics

Variable (IQD)	Mean	Median	Standard deviation	Minimum	Maximum
SP	10.5	8.3	3.2	2.5	15.7
EPS	1.5	1.3	0.8	0.2	3.1
BVPS	8.7	7.9	3.0	2.3	15.4
CFPS	3.4	3.1	1.7	0.9	7.2

Table I shows values of standard deviation for EPS, BVPS, CFPS, and SP between 3.4 (BVPS) and 0.8 (EPS), which ensures the absence of outliers except for the values of SP that seem to be similar to BVPS values. The results of this table ensure that the scores lie within the normal distribution range.

Correlation Analysis

The second test is the correlation analysis to evaluate the association between two variables in the study. As illustrated in Table II, there are positive and strong associations among the study’s variables, especially between the DV and IVs. The stronger correlation among these variables is between SP and EPS, then SP and BVPS, and finally, SP and CFPS.

Table II. Correlation Analysis

Variable	SP	EPS	BVPS	CFPS
SP	1.000	0.745	0.682	0.543
EPS	0.745	1.000	0.578	0.431
BVPS	0.682	0.578	1.000	0.503
CFPS	0.543	0.431	0.503	1.000

Regression Analysis Results

Table III shows the regression analysis results in this section, highlighting the relationships between the IVs (EPS, BVPS, CFPS) and the DV (SP). The intercept is 1.214, which is not statistically significant (p-value = 0.220). This means that when all independent variables are zero, the expected stock price is 1.214 IQD, though this value is not meaningful due to the lack of statistical significance.

Table III. Regression Analysis Results

Variable	Coefficient	Standard error	t-Statistic	p-value
Intercept	1.214	0.987	1.230	0.220
EPS	4.321	0.842	5.130	0.000
BVPS	1.765	0.524	3.367	0.001
CFPS	0.987	0.451	2.188	0.030
R-squared	0.678

The coefficient for EPS is 4.321, which is highly significant (p-value = 0.000). This indicates that for every 1 IQD increase in EPS, the stock price increases by 4.321 IQD, holding other factors constant. This strong positive relationship suggests that earnings are highly value-relevant in the Iraqi market.

The coefficient for BVPS is 1.765, which is also significant (p-value = 0.001). This implies that for every 1 IQD increase in BVPS, the stock price increases by 1.765 IQD, holding other factors constant. This shows that book value is an important determinant of stock prices.

The coefficient for CFPS is 0.987, which is significant (p-value = 0.030). This means that for every 1 IQD increase in CFPS, the stock price increases by 0.987 IQD, holding other factors constant. Although significant, the impact of cash flows on stock prices is less pronounced compared to EPS and BVPS.

The R-squared value is 0.678, indicating that approximately 67.8% of the variance in stock prices is explained by the independent variables (EPS, BVPS, and CFPS). This suggests a good fit of the regression model.

The F-value of 70.43 with a p-value of 0.000 indicates that the overall regression model is statistically significant, meaning that the independent variables collectively explain a significant portion of the variation in stock prices. These results confirm the value relevance of accounting information in the Iraqi market, particularly the strong impact of earnings and book value on stock prices.

Discussion

Since understanding the value relevance of accounting information helps investors to make more informed decisions, this leads to better investment outcomes. In Iraq, where market efficiency may be lower than in developed markets, investors should pay particular attention to earnings and book value as key indicators of firm value. However, the value relevance of accounting information has been reflected by examining the relationships among different accounting variables and stock prices and found different conclusions.

The results of the study show a significant positive relationship between ESP and SP and are highly value-relevant in the Iraqi market. This result is consistent with Sharmaet al. (2023), who concluded that EPS has an incremental impact on the prices of Indian banks, and with Rahman and Liu (2021), who found that the value relevance of earnings per share has a more significant influence on the market share price compared with other accounting variables.

The relationship between BVPS and SP is also significant, indicating that this accounting variable is an important determinant of SP. This result is consistent with Khader and Shanak (2023), who found that BVPS, among various accounting variables, had the highest impact on stock prices in Jordanian markets. This variable is more relevant in loss-reporting and intangible-intensive firms compared to profit-reporting and non-intangible-intensive firms (Kumari & Mishra, 2023).

Compared with previous studies, mixed results have been found. These variables are highly value-relevant in the US (Barthet al., 2001), while they are broadly irrelevant in the industry sector valuation (Amir & Lev, 1996); declining in earnings relevance and increasing in book value relevance have been found by other studies (Collinset al., 1997; Francis & Schipper, 1999) and a weak relationship between stock price and accounting information has been found by Lev and Zarowin (1999).

Although The relationship between CFPS and SP is significant, the impact of this accounting variable on SP is less pronounced compared to EPS and BVPS. This result is consistent with Akgün and Memiş Karataş (2023) who conclude the positive impact of this variable on return on equity. While there is a positive relationship between financial performance and operating cash flow, investing, and financing cash flows were negatively correlated with performance in Greece (Rompotis, 2024).

Earnings, book value and cash flows have higher explanatory power of the stock price changes for international oil and gas companies (Misundet al., 2005), and in India (Vishnani & Shah, 2008) and by Khanaghaet al. (2011) in Iran. The results of the mentioned studies are consistent with those of the current study which are inconsistent with Barthet al. (2020) that presented a decline in the value relevance of accounting information over the years regarding to U.S. firms.

The comparison between the results of accounting information relevance in ISX and those from developing and developed financial markets is a part of the discussion section in the current study. Like this comparison presents the special factors affecting the ISX and highlights ideas on how the accounting information relevance can be influenced by those factors. The earnings are value-relevant in general, while book value and cash flows show different levels of relevance in the current study. This is similar to other results from Saudi Arabia (Alsaeed, 2006) and the UAE (Al-Shammariet al., 2008). Another study in Palestine Stock Exchange found that CFPS should be a crucial factor for investors when making investment decisions (Sabriet al., 2020).

The separate earnings and book value are more value-relevant in the stock price model employed for ISX data (Shamki, 2022). The accounting information relevance is affected by Iraq’s special economic factors, containing its enormous dependence on oil incomes and the continuous political instability. Those Iraq’s special factors influence the financial reporting reliability and transparency, thus impacting the perceived value relevance of accounting information (Hamza & Hassan, 2017).

Consistent with many studies detecting that the accounting information is value relevance after the IFRS adoption (Bhatia & Mulenga, 2019 and Liu & Wang, 2023), the findings of the current study assert the need for the full adoption of IFRS in Iraq to improve the transparency and reliability of accounting information. Policymakers should consider adopting international accounting standards and improving regulatory oversight to ensure high-quality financial reporting.

Conclusion

The study finds that accounting information, particularly earnings and book value, is moderately value-relevant in Iraq. These findings indicate that financial statement information plays a significant role in stock price determination, although market inefficiencies may dampen its impact.

This research contributes to the limited body of knowledge on the value relevance of accounting information in emerging markets, specifically in Iraq. It provides empirical evidence that can assist future studies and policymaking.

The study faced some limitations, such as the relatively small sample size, data availability constraints, and potential market inefficiencies that may affect the results. Future research should consider extending the study period, expanding a larger sample, and exploring additional variables that may influence stock prices.