1.1 GENERAL DESCRIPTION OF THE STUDY
The significance of accounting earnings for equity and firm valuation has been a topic of considerable research since the 1960s. Accounting earnings could simply be defined as the excess of income over expenditure, the earnings which is usually reflected in the financial statement of a company is usually obtained in line with the accrual concept which recognizes all income and expenses earned or incurred in a particular period irrespective of whether cash has actually been received or paid. Also, this earnings figure in the financial statement is made up of various components such as the earnings before interest and tax, earnings after tax, earnings after tax and extra-ordinary items etc.
In this context, accounting earnings would be considered as a source of information to be used by investors and analysts to enable them have an idea about the real performance of companies and also aid them in firm valuation. The value of a firm could be seen as a function of its future performance and this future performance depends on realized accounting earnings which are normally disclosed in the firm’s financial statements.
Since earnings are said to be a determinant of the value to be placed on a firm; the question would arise as to how value relevant is earnings? Earnings would be considered to be value relevant if it is able to capture and summarize the firm’s value. The value relevance would be measured as a statistical association between the financial statement earnings and the market value of the firm and earnings would be said to have quality if it is able to predict its future value.