The value relevance of unrealized gains and losses recognized under IAS 39 : Evidence from Kuwait

Purpose – The study aims to examine the role of unrealized gains and losses recognized under international accounting standards (IAS) 39 in explaining stock prices for investment companies listed on the Kuwait Stock Exchange (KSE), and how the inclusion of unrealized gains and losses in income numbers affect the incremental explanatory power of earnings. Design/methodology/approach – The study utilizes Ohlson’s (1995) valuation model combined with a technique developed by Theil (1971) that has been applied in several prior studies. Findings – The results of the cross-sectional regression indicate that net income and book values jointly and individually are positively and significantly related to stock prices; the incremental information content of net income is greater than that of book values; the inclusion of unrealized gain in income numbers increases the explanatory power of the model; and the incremental information content of net income before unrealized gains and losses is lower than that of book value. Thus, including unrealized gains and losses from investment in net income enhances the incremental information content of earnings. Our overall results show that unrealized gains and losses play an important role in explaining stock prices for investment companies in Kuwait, and that including them in the income numbers increases the incremental explanatory power of earnings. Originality/value – This study is original because it is the first to empirically investigate the role of unrealized gains and losses recognized under IAS 39 in explaining stock prices for investment companies listed on the KSE and how the inclusion of unrealized gains and losses in income numbers affect the incremental explanatory power of earnings.