Value relevance of accounting information during IFRS convergence period: comparative evidence between India and Indonesia

Abstract

Purpose This study aims to examine the financial reporting quality during the International Financial Reporting Standards (IFRS) enforcement period in the emerging markets of India and Indonesia by using Ohlson’s (1995) valuation model. The study further endeavors to compare the quality of the reporting environment and its impact on stock prices for both these emerging economies by using a price model during the IFRS conversion period. Design/methodology/approach This paper aspires to obtain insights about the value relevance of accounting information during the IFRS enforcement period for India and its Southeast Asian neighbor, Indonesia which is identical in terms of inclusive growth and development. In that context, 3,325 Indian (National Stock Exchange indexed) and 815 Indonesian (Indonesian stock exchange indexed) firm-year observations were examined by using Ohlson’s price valuation model for five years, representing the IFRS adherence period. Findings The findings of the paper insinuated that the value relevance of book values and earnings, both, have increased throughout the IFRS enforcement period for both economies. However, the investigation revealed that the incremental interpretive power of earnings is more substantial and evident during the IFRS adherence phase than book values which indicates investor’s inclination toward earnings management over book values. Research limitations/implications The findings may assist the regulators, investors, firms and standard setters of both economies in examining the effectiveness of financial reporting curriculums as it brings forth informational improvement in the financial market. This study also outstretches the discussion on the subject in other emerging nations where the market is imperfect with insufficient information, poor enforcement and limited regulations. This investigation has few limitations such as limited data and period, only two emerging economies and two control variables, thus provide scope for future research. Social implications This paper endeavors to investigate and compare the value relevance of accounting information during IFRS convergence period between India and Indonesia with an aim to assist in improved decision making for both, regulatory bodies and market participants in both the countries. Originality/value The key contribution of the study is to examine whether the accounting information is value relevant during the IFRS convergence period for the two fastest-growing economies in Asia, India and Indonesia and it is the first such empirical research to the best of the author’s knowledge. The study is an extended contribution to the modest research administered in developing nations.

Value relevance of financial information: A comparative study of pre- and post- implementation of Indian accounting standards

“…The findings of the study on the value relevance of book values and earnings in Indonesia and India revealed that it increased during the period when IFRS was enforced. It was also found that the scope for earnings management reduced in this period, which otherwise prevailed (Srivastava & Muharam, 2022).…”

Predictive view of the value relevance of earnings in India

“…Another stream of researchers has examined the impact of IFRS on the value relevance of earnings under the Indian institutional settings. Srivastava and Muharam (2021) examined the financial reporting quality during the IFRS enforcement period and find that the value relevance of book values and earnings have increased throughout the IFRS enforcement period. On the contrary, Bansal et al (2021) find that misclassification practices (a form of earnings management under which managers misclassify the revenue and expense items within income statements to report inflated core earnings) have been significantly increased after the mandatory adoption of IFRS.…”

“…Prior studies (for instance, Adhikari et al , 2021; Bansal and Garg, 2021; García et al , 2017; Srivastava and Muharam, 2021) have examined the value relevance of earnings with the adoption of International Financial Reporting Standards (IFRS). However, the adoption of IFRS-based standards in India is different in two ways.…”