The Analysis of Inflation Rate, Firm Size and Earnings Persistence Effects on Value Relevance of Earnings

This study investigates the value relevance of earnings at Tehran Stock Exchange (TSE). The study is motivated by the recent value relevance litterateur in emerging markets. First، using a sample of listed firms in the TSE، we examined the value relevance of earnings based on a return model and panel data regressions during 2005 to 2009. Then، we addressed three questions on the value relevance of earnings. First، regarding the high levels of inflation in Iran، we examined its effect on the value relevance of earnings. Second، we investigated whether the firm size (measured by natural logarithm of market value) affected value relevance of earnings. Finally، using a ratio (operating income to pretax income)، we examined the effect of earnings persistence on value relevance of earnings. Results show that the level of value relevance in Iran is higher than levels reported by studies conducted on more mature markets. The inflationary conditions during the period under study resulted in lower value relevance of earnings. While there is a significant relationship between accounting earnings and market returns in both small and large firms، investors place more weight on earnings in large firms. Finally، we found that investors in TSE didn’t distinguish companies that had more persistent earnings from those had less، and they only considered on the final number.