Value Relevance of Financial and Non-Financial information

Abstract

Value Relevance of accounting numbers has been tested in different countries in different institutional settings. However the research on Value Relevance has largely been concentrated in the US market. There is a growing body of literature which suggests that financial statements are loosing their value relevance because of the shift from a traditional capital-intensive economy to a high-technology, service-oriented economy. This study examines the value relevance of financial and non financial information, for Indian Pharmaceutical Industry, derived under the Indian GAAP that assures complete compliance with the International Accounting Standards. The study uses valuation model by Ohlson (1995) to test the value relevance of accounting numbers. The Indian Pharmaceutical Industry provides a unique case to test the value relevance as it is the most R&D intensive industry in India. Further the pharmaceutical industry provides an experimental field for studying the value relevance of R&D capitalization, as both accounting treatments of R&D costs (expensing and capitalization) are allowed. The study is divided into six chapters. Chapter 1 introduces the topic of the study and is followed by chapter 2 on the literature survey. Literature survey is divided into two subsections. The first sub-section presents the literature on the Pharmaceutical Industry followed by the second subsection which presents the literature on the theoretical and empirical tests of value relevance. The review of the literature enables in identifying the research gaps, which are discussed next chapter, 3. This is followed by the objectives of the study, the hypotheses for the present study, the econometric model for the study and the operational definitions of the variables in the study. Chapter 4 is the ‘methodology’ section. This section describes the procedure pertaining to model testing including the sample, data collection procedure and lastly the distribution of the sample. Chapter 5 discusses the results of the study. Eviews 3.1 has been used to analyze the unbalanced panel data. The hypotheses were tested through statistical tools like t-test, ANOVA, Generalized least square with firm effects regression. The results section consists of the presentation of the findings for the study in two major sections. The first section comprises of the findings based on the descriptive statistics, transformation of variables to follow normal distribution, comparison of characteristics of the accounting numbers based on size, year and nature of earnings, correlation and partial correlation analysis. The second section describes the results on the findings of the study with respect to the model testing. Generalized least square method with fixed firm effect has been used to test the model. The independent variables that are examined are earning per share, book value per share, cash flow from operations per share, dividend per share, R&D expenditure under capital account, R&D expenditure under current account and intangible asset expenditure. Control variables in terms of size and beta are also examined. Chapter 6 presents the discussion and conclusion of the analysis reported in the previous chapter. The chapter first discusses the univariate analysis, the results show that there has been a increase in R&D investment over the period of 1996-2006. Further large sized firms only do significant amount of R&D and intangible investment. The result of correlation analysis validate that there exists strong and positive correlation between R&D investment and sales and R&D investment and intangible asset expenditure. The next section discusses the result of the model testing. The results show that financial information conveyed by earnings, book value, cash flow and dividend is very much relevant for the Indian Pharmaceutical industry. Further R&D expenditure under capital account send positive signals to the investors as it is associated with the investment in projects with high degree of success. Moreover R&D expenditure is negatively associated to the price of the stock by the investors. Further the incremental explanatory power of non-financial information have not increased over a period of time. The relevance of the financial variables when the firms are classified under transitory and permanent earnings. The results indicate that dividend per share is the most relevant variable for the under transitory earnings reaffirming the profitability hypothesis. This chapter concludes with sections on theoretical and practical implications of the study, limitations and future research directions.