The value relevance of consolidated financial statements in an emerging market: the case of India

Abstract

Purpose: India is one of the few countries where companies are required to give both consolidated financial statements (CFS) as well as parent-only financial statements. While parent-only statements have been in existence for a long time, CFS was introduced recently. The purpose of this paper is to examine the value relevance of CFS in India. Design/methodology/approach: The value relevance of CFS is examined through an empirical study. The study examines the relationship between market values and consolidated earnings and parent-only earnings is analysed. The study uses four years data of 59 companies whose subsidiary earnings are more than 20 per cent of consolidated revenue. Findings: Initial results show that annual CFS are not value relevant, whereas annual parent-only financial statements are value relevant. However, wherever quarterly financial statements are available, CFC are found to be value relevant and parent-only financial statements are not value relevant. Practical implications: While CFS and parent-only financial statement on an annual basis are mandatory, companies have the option to publish parent-only financial statement on a quarterly basis while not reporting quarterly consolidated financial statements. This inconsistency in the regulation causes confusion to investors who receive parent-only quarterly financial statements for three quarters and suddenly consolidated financial statements at the end of the year. The paper shows how market reacts to such reporting practices. Originality/value: In addition to examining the value relevance of CFS, the paper also examines the impact of incomplete regulations of financial reporting on asset pricing.