Does institutional ownership affect the value relevance of accounting information?

• DOI: https://doi.org/10.1108/IJAIM-03-2019-0038
• Pages: 323-342
• Date: 06 March 2020
• Published date: 06 March 2020
• Author: Mohamed Omran,Yasean A. Tahat
• Subject Matter: Accounting/accountancy,Accounting methods/systems,Accounting & Finance

Does institutional ownership

af‌fect the value relevance of

accounting information?

Mohamed Omran

International Business School Suzhou, Xi’an Jiaotong-Liverpool University,

Suzhou, China, and

Yasean A. Tahat

Accounting and MIS Department, Gulf University for Science and Technology,

Mishref, Kuwait

Abstract

Purpose –Drawing upon agency theory,this study aims to assess the value relevance (VR) of accounting

information released by non-f‌inancialf‌irms listed on the Kuwait stock exchange for the period of 2015-2018.

Also, the inf‌luence of institutionalownership level and other explanatory variables, namely, book valueper

share, earningsper share, growth in assets and changes in f‌inancial leverage on share prices is examined.

Design/methodology/approach –To test the hypotheses, the Ohlson (1995) model is extended. This

study uses panel data analysis and applies appropriate statistical techniques to measure empirical

relationships.

Findings –The results show that the VR of accounting informationreleased by the Kuwaiti non-f‌inancial

listed f‌irms variesover the period of 2015-2018. Book value and earningshave signif‌icant and positive effects

on share prices. In recent years, the VR of book value informationhas been growing, while that of earnings

information has been declining. Institutional ownership level has a signif‌icant and positive inf‌luence on the

VR of accounting information released by the Kuwaiti non-f‌inancial listed f‌irms. The f‌indings conf‌irm a

positive power, signalling growthin assets regarding the share prices. However,no signif‌icant relationship

between changesin f‌inancial leverage and share prices is found.

Practical implications –The f‌indings of the study provide evidence of the linkage between VR and

institutional ownershiplevel, which promotes the understandingof the inf‌luence of institutional investors on

af‌irm’s marketvalue. Empirical evidence from Kuwaitwill have international implications andcan serve as a

guide for accounting researchers studying other emerging markets. Capital market regulators can provide

guidelines in the form of information characteristics and elements of f‌inancial statements that need

improvement. Finally, the f‌indings assist non-f‌inancial listed f‌irms to enhance the quality of accounting

informationby identifying the strengths and weaknesses in their f‌inancial reports.

Originality/value –This study extends the previous literature by investigating a relatively new set of

data in more depth than that has been examined by prior research, which focusses on the relationship

between accountinginformation and the f‌irm’s market value.

Keywords Kuwait, Value relevance, Institutional ownership, Financial leverage, Growth in assets

Paper type Research paper

1. Introduction

The Kuwait oil discovery, alongside the remarkable increases in oil prices over the

nineteenth century, has resulted in a dramatic rise in business activities and trading

JEL classif‌ication –M41, O16, P22

Value

relevance of

accounting

information

323

Received14 March 2019

Revised9 July 2019

Accepted17 August 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 2, 2020

pp. 323-342

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-03-2019-0038

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

volumes. This also led to the initiation of newly and successively established corporations,

which necessitate a capital market in which capital can be raised and equity can be

exchanged. However, the trading of equity instruments was not in place until the 1970s,

when the government of Kuwait began to keep records of stock trading and related

activities. Moreover, government supervision and regulation over stock trading as been

quite insignif‌icant(Almujamed et al.,2017).

In 1982, the Kuwait stock exchange (KSE) was established under the supervision of the

market committee (MC), whichwas delegated the authority to regulate and oversee the stock

market. This dual role of the MC has been criticised by professionals and academics, who

have called for a separation ofregulation and supervision duties (Al Mutairi et al.,2011). In

2010, new legislation was enacted to establish the Capital Markets Authority (CMA),

whereby all listed f‌irms are required to adopt the corporate governance rulesmandated by

the CMA. These rules aim at improving the functioning of f‌irms’activities and operations,

enhancing transparency and credibility of corporate reports, and prompting inf‌lows to the

KSE, especially by foreigninvestors (Almujamed et al.,2017). With respect to the accounting

regulations, the KSE requires all listed f‌irms to implement the International Financial

Reporting Standards (IFRS) to enhance transparency and comparability of released

information.

The value relevance (VR) of accountinginformation has received signif‌icant attention in

the extant literature in both developed (Barth et al.,1996,2001) and developing countries

(Ahmed, 2015;Tahat and Alhadab, 2017). In terms of Kuwait, several studies have

examined it (El Shamy and Al Qenaie, 2005;Al-Faraih et al.,2012;El Shamy et al.,2014);

however, these studies do not considerhow it might be affected by f‌irm-level characteristics.

In this regard, other studies (Cai and Zhang, 2011;Glezakoset al.,2012;Bahreini et al.,2013)

identify specif‌icf‌irm characteristics (i.e. institutional ownership, growth, f‌irm size, f‌irm

industry, leverage and governance) that can affect the VR of accounting information. Yet,

thus far, no research has investigated the potential effect of such f‌irm-specif‌ic features on

the VR in a developing countrysetting (i.e. Kuwait). This provided a rationale to conduct the

current study to examine the VR of accountinginformation in conjunction with a unique set

of institutional settings (institutional ownership level, growth in assets and changes in

f‌inancial leverage)in the capitalmarket of Kuwait.

Undeniably, institutional investors have more resources and higher levels of expertise

that are of interest to businesses compared with their smaller counterparts. In addition,

institutional owners’can meet the demand of securities’markets by providing the supply,

and this, in turn, can signif‌icantly affect their equity values (Chen et al.,2016). However,

such investors do not face high defensive regulations because they are experts and they

possess the resources to protect themselves (Ji et al.,2015;El-Helaly, 2016). Institutional

investors mainly include commercial banks, insurance companies, endowment funds,

mutual funds, hedge funds and pensionfunds.

According to Al-Faraih et al. (2012), ownership structure in the Kuwaiti listed f‌irms is

highly concentrated, as individuals hold a majority of the public shareholding f‌irms across

all sectors; in particular, they own substantial shares in the service, industrial and f‌inancial

industries of about 17 per cent, 28 per cent and 29 per cent, respectively. Further, family-

owned f‌irms represent a signif‌icant proportion of the banking industry, at 27 per cent, and

the industrial sector, at 16 per cent. The Kuwaiti government owns over 10 per cent across

all sectors. The KSE requires stockholders to report their ownership in the capital market

when these sharesare greater than 5 per cent of a f‌irm’s equity (Al Mutairi et al.,2011).

We select Kuwait as a research setting for a number of reasons.One is the rapid growth

of the country as an emerging economy with a signif‌icant potential for foreign investment.

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