Financial statement quality: first evidence from the Georgian stock exchange

In the 21st century, already witness to unparalleled rates of globalization, discernible economic success can hardly be achieved without developed stock markets. In case of Georgia, the stock exchange remains in nascent stage of development and positions as one of the smallest and most illiquid stock markets worldwide. With the assistance of sound theoretical and first-hand empirical analyses, this work teases out the limited properties of the Georgian Stock Exchange by focusing on the overlooked avenue of financial statement quality, and addresses whether investors at this market are able to implement efficient investment decisions by relying on the disclosed financial information. The book adds to the existing literature on financial statement quality by providing insights to the reporting environment at an (as of yet) unexamined, underdeveloped stock market of Georgia and obtains a particular weight on the country’s way towards harmonizing its reporting standards with the European best practice. The book is structured into three main chapters, accompanied by an introduction and conclusions with policy recommendations. Chapter two serves as a broad literature review, but it is simultaneously focused so that it introduces financial statement quality metrics utilized in the econometric part (chapter four). Chapter three draws a holistic picture of Georgian reporting environment by taking its financial, legal, political, and accounting systems into consideration. Chapter four addresses the empirical evidence on the financial statement quality operationalized through time-series properties of earnings, earnings management, and accounting conservatism. Statistical tests predicate on the primarily collected dataset of 83 Georgian Stock Exchange incorporated JSC’s financial information from 2005 to 2013, constituting around 500 firm-year observations. As such, the reporting here represents the first exploration of this manually collected data.