Share price anticipation of future earnings in the presence of financial leverage, proprietary cost and institutional ownership: Evidence from MENA emerging markets

Abstract

This study investigates share price anticipation of future earnings in the context of Middle Eastern and North African (MENA) emerging countries. We also examine whether the relationship between stock return and future earnings vary with companies' financial leverage level, in the presence of proprietary costs and institutional ownership.In this paper, we use the modified future earnings response coefficient model (FERC) of Collins et al (1994) to measure the ability of stock prices to predict future earnings in the presence of institutional owners, political and proprietary cost for a sample of 69 firms in MENA emerging capital markets and during the period of 2005-2008. Our research model builds on multiple regression analysis and assumes interaction between current and future earnings and the above mentioned variables. We show that the informativeness of current earnings is negatively associated with financial leverage level, institutional ownership and proprietary cost. Our results indicate moreover that the presence of institutional owners do not help stock prices predict future earnings. Furthermore, neither firms’ leverage nor lower market entries barrier seems to have an impact on current returns anticipation of future earnings.Providing evidence on the information content of earnings and its interaction with some proprietary, political and governance factors in the context of MENA emerging markets helps to a better understanding for capital market participants of the value relevance of such financial information.This study adds to the literature on share price anticipation of earnings in two crucial respects. First, on a theoretical basis we consider the effect of Proprietary Cost, political cost and institutional ownership on the future return earnings relationship. Second, we give some insight into the future return-earnings relation in MENA emerging countries.