Role of the Net Assets in Assessing the Relevance of Earnings

Abstract

This study considers that in Sri Lankan share market, the accounting variables would significantly explain the contemporaneous price, provided that Ohlson (1995) model implicate market efficiency. The study also attempts to explore the benchmarking role of net assets in assessing the value relevance of earnings and dividends. The results indicate positive significant relevance of net assets, earnings, and dividends for explaining the price, independently. Pooled and fixed-year effect results of the model imply incremental relevance of accounting variables. However, this is not consistent with year-wise analysis, thus implying that Sri Lankan share market might be of weak form efficiency. The findings are repeatedly confirmed with the fixed-sector results, which are almost similar to fixed-year effect results. The benchmarking role of net assets in exploring the incremental relevance of earnings becomes meaningful only with the pooled analysis. Differently, the relevance of dividends is explored with the proxy role for future earnings, beyond current earnings.

Keywords: Accounting Variable, Value Relevance, Net Assets, Earnings, Dividends, Ohlson.

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