Academic journal article South Asian Journal of Management

Value Relevance of Financial Reporting and Its Impact on Stock Prices: Evidence from India

Academic journal article South Asian Journal of Management

Value Relevance of Financial Reporting and Its Impact on Stock Prices: Evidence from India

Article excerpt

The main aim of this paper is to examine the value relevance of financial statements. To achieve this, various models that include specific indicators, which have proved to be important indicators of financial statements analysis in the Indian capital market, are developed. The value relevance of each variable is measured in both, annually and pooled for each model. The data were collected from a sample of 71 non-financial CNX 100 firms listed at the National Stock Exchange (NSE). The time frame spans from 2000 to 2008 and the methodology used was Ordinary Least Square (OLS) multiple regression models. The result reveals that value relevance of financial statements, per se, is negligible in Indian markets. However, some ratios based on these financial statements show significant association with stock market indicators. Our results depart from studies conducted in other markets. The results further indicate that the value relevance of Return On Net Worth (RONW) is statistically significant and is a useful measure for investment decision.

INTRODUCTION

Accounting research has extensively examined the value relevance of accounting data in order to assess the usefulness of financial information to investors (Papadaki and Siougle, 2007). The basic objective of financial accounting and statements is to provide information that is useful for efficient decision making to various stakeholders. The 'true and fair view' principle about financial statements has been legally embedded in Generally Accepted Accounting Principles (GAAP), in the majority of the developed countries worldwide (Dimitropoulos and Asteriou, 2009). Since, investors are considered the most important group of decision makers that use accounting information, so it is important to examine the value relevance of accounting information to facilitate them in decision making.

Accounting information is defined as value relevant if it has a predicted association with equity market values, i.e., stock returns. Value relevance studies are designed to assess whether particular accounting figures reflects information, that is used by investors in valuing firms' equity (Barth et al., 2001). Financial statements are said to be value relevant if they are associated with stock prices, values or returns. Lev (1989) asserted that the relevance of accounting value was characterized by the quality of accounting information. In this study, earnings quality was measured as the coefficient of determination in a regression of market returns on earnings. Worldwide, research on value relevance of financial statements is motivated partly because of listed companies use financial statements as a medium to communicate with investors and general public and partly by the fact that various regulators (stock market as well accounting) are putting lot of emphasis on improving the quality of disclosure and increasing transparency level of financial reporting, so it is necessary to investigate the value relevance of such statements. In recent years, the value relevance of accounting information has been criticized by the stock market researchers in accounting (ElShamy and Kayad, 2005). Studies conducted recently in the advanced and developed economies have created the impression that financial statements are losing their value relevance on the ground of less or no associations with stock market indicators such as price or returns. This is perhaps because of increasing movement from industrial economies to a service oriented economies (Dontoh et al., 2007). Many studies on value relevance concluded the declining association between accounting information and stock prices over the time (Lev and Zarowin, 1999; and Core et al., 2003).

While there has been number of studies on the value relevance of financial statements in the developed countries especially in US and UK (Amir et al., 1993; Ball and Brown, 1968; Board et al., 1989; Collins et al., 1997; Livnat and Zarowin, 1990, etc. …

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