Value relevance of earnings and book values during IFRS convergence period in India

Abstract

Purpose The authors aim to examine the association between earnings and book values with stock prices in India during the IFRS convergence period because, in India, the literature is yet to investigate more about IFRS convergence and its impact on the financial reporting environment. Hence, the purpose of this study is to assess the influence of IFRS conversion on the value relevance of accounting information throughout the IFRS conversion period. Design/methodology/approach The current paper endeavors to investigate the earnings and book values affiliation with stock prices in India during the IFRS convergence period by employing a price valuation model (Ohlson’s Model). The study assembled a total of 3,440 firm-year observations from the National Stock Exchange in India over five years, which signifies the IFRS conversion period (2015–2019). Findings The research findings displayed that accounting information such as earnings, book value has value relevance throughout the IFRS enforcement period; however, the value relevance has been increasing for earnings and showing a descending association for book value. The significant explanatory power of earnings reveals that market participants give more weightage to earnings than book values. Overall, the findings of the study will facilitate improved decision making for both, capital market participants and regulators, by highlighting the key areas for improvement in the Indian capital market. Research limitations/implications This study also extends a discussion on the subject in those economies where regulations are weak and the market is imperfect with asymmetrical information. Practical implications The research outcome provides for empirical shreds of evidence regarding the value relevance of accounting information during IFRS enforcement in India, where IFRS is a recent emergence. Social implications This paper examines the value relevance of accounting information during IFRS convergence period in India which will felicitate improved decision making for both, market regulators and investors. Originality/value This research is the first factual documentation regarding value relevance of earnings and book value during the IFRS enforcement process in India with the most recent data and contributes to the limited study conducted in developing nations like India.

The value relevance of accounting information: empirical evidence from Jordan

“…Chen et al (2001) have reported that book value and earnings are value-relevant in various segments of the Chinese stock market based on empirical evidence from 1991 to 1998. Other researchers (Ragab and Omran, 2006;Bae and Jeong, 2007;Pourheydari, Aflatooni, and Nikbakhat, 2008;Al-Hares, AbuGhazaleh, and Haddad, 2012;Bilgic and _ Ibis, 2013;Omokhudu and Ibadin, 2015;Ahmadi and Bouri, 2018;Rahman and Liu, 2021;Srivastava and Muharam, 2021;Cupic et al, 2022) have found similar results in different global markets. Ragab and Omran (2006) have conducted research to examine the relevance of earnings value and book value in the Egyptian Stock Market from 1998 to 2002.…”

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

“…A study on the explanatory power of accounting variables on the market prices of shares in Germany and the UK by Elbakry et al (2017) suggested long-run Grangercausality of the accounting variables on the share prices in the UK, unlike the German markets due to the evolution of the standards in a highly politicized environment in the country. The earnings and book value has value relevance during the IFRS enforcement period in the Indian market, with a slight weakness in the book value compared to the earnings with the share price (Srivastava & Muharam, 2021). 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.…”

IFRS Convergence and Value Relevance of Indian Accounting Information: The Earnings-Returns Association Analysis

“…The findings of the study are, however, based on the analysis of only two years, as it compares one year each as a pre-and post-IFRS year. Similarly, Srivastava and Muharam (2021) carry out a cross-sectional and pooled data analysis on Indian financial reporting data between 2015-2019. They observe a gradual increase in the year-wise adjusted R 2 , implying an increase in value relevance.…”

“…Value relevance studies of Indian firms have revealed a positive relationship between accounting information and market values (Bhatia & Mulenga, 2019;Robu et al, 2017;Sharma et al, 2012;Vardia et al, 2016). However, few researchers have addressed the issue of value relevance since the IFRS convergence process began in India using relatively smaller samples (Bansal & Garg, 2021;Kaur & Yadav, 2020;Srivastava & Muharam, 2021;Vardia et al, 2016). The aim of this paper is, therefore to widen the knowledge on Indian financial reporting quality in the post-IFRS convergence phase using returns value relevance as the quality metric.…”