A Study on the Impact of the Quality of Accounting Information on Stock Returns - Saudi Empirical Evidence

Abstract

The objective of this study is to document empirical evidence with respect to the impact of the quality of accounting information on stock returns in the Saudi capital market. The study adopts the empirical accounting framework of Miao et al. (2021), where expected stock returns may be explained in terms of the quality of accounting information via the role of systematic risk factor loadings uncertainty. The study contributes to the contemporary capital markets accounting literature by producing an empirical evidence with Saudi market data as to the direct relationship between the quality of accounting information and expected stock returns. In particular, the study introduces and tests the parameter of an interactive term where the impact of the quality of accounting information on expected stock returns depends on the level of the risk factor loading uncertainty in order to test Miao et al. (2021) claim that the impact of accounting information quality on expected stock returns must be channelled through the uncertainty underlying estimating risk factor loadings. Furthermore, the study delineates that the quality of accounting information is an output of a costly system by introducing and testing the parameter of a quadratic term of accounting information quality where the marginal impact of the quality of accounting information on expected stock returns depends on the current level of the quality of accounting information. Toward this end, the study produces an empirical evidence that as the value of the measure of accounting quality is increased by one unit, the value of the uncertainty associated with the assessment of the risk factor loading is decreased by 3.4368. Moreover, the study shows that the relationship between the quality of accounting information and expected returns is empirically most accentuated for higher levels of factor loadings uncertainty. The study also empirically suggests that the relationship between the quality of accounting information and expected returns might be governed by the dynamics of a concave production function where the impact of the quality of accounting information on expected returns is expected to be more accentuated for higher levels of the quality of accounting information. The empirical evidence produced in this study is in line with that in Miao et al. (2021) on the direction of the association relationship between the quality of

iv accounting information and systematic risk factor loading uncertainty. The evidence, however, contradicts that in Miao et al. (2021) on the direction of the relationship between the quality of accounting information and expected equity returns. The empirical evidence in this study, however, is supported by the fundamental relationship between risk and return in finance and economics.