Kumari2020 PDF

Journal of International Accounting, Auditing and Taxation 39 (2020) 100321
Contents lists available at ScienceDirect
Journal of International Accounting,

Auditing and Taxation
Value relevance of aggregated and disaggregated earnings in

India: Significance of intangible intensity
Pooja Kumari 1,∗ , Chandra Sekhar Mishra 2
1
Fore School of Management, New Delhi, New Delhi, India
2
Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur, India
a r t i c l e i n f o a b s t r a c t
Article history: This paper explores the relative performance of aggregate earnings and disaggregated earn-
Available online 27 May 2020 ings components (accruals and cash flows) to describe the market values of equity and
earning persistence in India. Further, we explore the difference in value relevance of earn-
ing and earning components to explain market values of equity and earning persistence
between intangible and non-intangible intensive firms. We adopted the Barth et al. (1999,
Keywords: 2005) linear information structure, which is based on the Ohlson (1999) model. Our findings
Aggregated earnings suggest that the disaggregated earnings outperform aggregated earnings to explain market
Disaggregated earnings values of equity and earning persistence, irrespective to the nature of a firm’s intangible
Equity value
intensity. However, the incremental explanatory power of disaggregated earnings is higher
Future earnings
Intangible intensity
in intangible intensive firms compared to non-intangible intensive firms. Moreover, the
incremental value relevance of accruals is higher than the incremental explanatory power
of cash flows in intangible intensive firms and lower for non-intangible intensive firms.
© 2020 Elsevier Inc. All rights reserved.
1. Introduction
In the accrual basis of accounting, transactions are recognized and recorded at the time of occurrence, whereas in the
cash basis of accounting, the recognition and recordings of transactions are according to the time of cash settlement. The
comparison of accrual and cash-based recording of transactions has been widely studied in capital market-based accounting
research (Barth, Cram, & Nelson, 2001; Ball, Gerakos, Linnainmaa, & Nikolaev, 2016; Barth, Beaver, Hand, and Landsman,
1999; Bernard & Stober, 1989; Dechow, 1994; Rayburn, 1986; Wang, 2013). The accrual-based accounting system facilitates
the accounting concepts of matching and revenue recognition. However, although the cash-based accounting system allows
for a readily verifiable measurement base, it is not compliant with all generally accepted accounting principles (GAAPs). In
other words, the accrual-based system accounts for economic and financial events on a time basis. Whereas, the cash-based
accounting system accounts for economic and financial events based on actual cash flow.
Several previous studies examined the extent to which the previous components of earnings add to the forecast of upcom-
ing components of earnings (Ball et al., 2016; Dechow, 1994). The Financial Accounting Standards Board (FASB) endorses
accrual-based accounting and positions the accruals component of earnings as a superior predictor of future earnings com-
pared to the cash flows component of earnings (FASB, 2010). Basically, accruals and cash flows are two disaggregated
components of aggregated earnings and accrual accounting consists of accruals, that is, earnings after deducting cash flow
∗ Corresponding author.
E-mail addresses: pooja.kumari@vgsom.iitkgp.ernet.in (P. Kumari), csmishra@vgsom.iitkgp.ernet.in (C.S. Mishra).
https://doi.org/10.1016/j.intaccaudtax.2020.100321
1061-9518/© 2020 Elsevier Inc. All rights reserved.
2 P. Kumari and C.S Mishra / Journal of International Accounting, Auditing and Taxation 39 (2020) 100321
from operations (Barth, Beaver, Hand, & Landsman, 2005; Barth et al., 1999). Many believe accruals are a superior measure
to describe future earnings, cash flows, and dividends (Barth, Beaver, & Landsman, 1998; Dechow, 1994). Conversely, Ball
et al. (2016) concluded that cash flow is a better measure to explain future earnings than accruals. Further, in some studies
both accruals and cash flows were found to be complementary for the prediction of future earnings (Farshadfar & Monem,
2013; Sharma & Iselin, 2003). In addition, Barth et al. (1999, 2005) found disaggregated earnings (cash flows and accruals)
aid in explaining equity values over aggregated earnings in the US market.
In last two decades, the value relevance of accruals as well as the cash flow components of earnings were explored
extensively in developed markets (Akbar, Shah, & Stark, 2011; Barth et al., 1999, 2005; Habib, 2008), where the institutional
environment is comparatively stable. But limited studies were based on emerging markets, where over time the institutional
environment is dynamic. Hence, this study investigates the effects of these disaggregated components of earning in the
Indian context. The first objective is to examine the temporal changes in incremental value relevance of disaggregated
earning components, such as accruals and cash flows over aggregated earnings, and to explain equity value, future earnings,
and persistence of earnings and earnings components in an emerging market, i.e. India.
Further, previous literature on the developed capital market proposed a switch from tangible intensive firms to intangible
intensive firms in the market, which results in intangible intensive firms having a significant role in an economy (Amir &
Lev, 1996; Chen, Chen, & Su, 2001; Lev & Zarowin, 1999). However, as a result of their hefty investment in intangibles
assets, Lev (2004) argued that the usefulness of GAAP-based financial reporting to investors is limited when it comes to the
valuation of technology grounded firms. The American Institute of Certified Public Accountants (AICPA) special committee
report (American Institute of Certified Public Accountants, 1994), also known as the Jenkins Committee, conveyed that due
to a shift from low-tech to high-tech industries, the value relevance of accounting information has been reduced. Further,
Srivastava (2014) and Starica and Kang (2017) found that the shifting of the economies towards intangible intensive firms is
a major cause for changes in the properties of earnings with time. Collins, Maydew, and Weiss (1997) and Dichev and Tang
(2008) also explained how increment in intangible intensive firms instigate variation in basic characteristics of earnings
and book value of equity. Additionally, Thi and Schultze (2011) concluded that accruals created through the capitalization
of investments in the creation of intangible assets add significant explanatory power in earnings to explain equity values.
Thus, this study assumes that being the components of earnings, the incremental value relevance of accruals and cash flows
over aggregated earnings could be affected by the nature of intangible intensity of the firm.
According to the 2017 Global Intangible Finance Tracker (GIFT) report published by Brand Finance, in regards to firms
having the most intangible assets, India ranked 13th of all countries and third in developing countries (Brand Finance,
2017). Thus, India is an ideal platform to investigate how intangible intensity impacts the incremental value relevance of
disaggregated earnings over aggregated earnings in an emerging market. Hence, the study’s second objective is to explore
in an emerging market, such as India, the difference in the incremental value relevance of disaggregated earnings over
aggregated earnings between intangible intensive and non-intangible intensive firms. Here, intangible intensive firms are
those whose operational nature demands more investment in innovation activities and, accordingly, have more internally
generated intangible assets.
To address the above stated objectives, the study uses the research design based on Ohlson (1999) that Barth et al. (1999,
2005) applied. The Ohlson (1999) model is the expansion of the Ohlson (1995) model to include permanent and transitory
components of earnings. According to Ohlson (1999), the persistence of earning components or the value relevance is the
ability of earning components to determine the market value of equity or to predict future abnormal earnings. Further,
Barth et al. (1999, 2005) implemented the Ohlson (1999) model to frame a linear information model (LIM) connectivity,
including accrual and cash flow components of earnings. Our findings suggest a significant difference between intangible
and non-intangible intensive firms in the value relevance of earnings and earnings components. Specifically, the incremental
value relevance of disaggregated earnings over aggregated earnings to explain the market value of equity and persistence
of earnings is higher in intangible intensive firms than in non-intangible intensive firms.
The study carries both theoretical and practical implications. Theoretically, it contributes to the ongoing debate regarding
the impact intangible intensity has on accounting information and its relevance quality. Specifically, it studies an emerging
market where intangible intensive industries are growing rapidly. India is a readymade platform for investigating the effects
intangible intensity has on accounting information and its value relevance quality in an emerging economy with a dynamic
institutional setting. Additionally, the study suggests that accounting standard setters should consider the operational nature
of firms in terms of intangible intensity and incorporate it into the conceptual framework of accounting standards. This
study can also contribute to the better formulation of Indian GAAP, as India is headed towards adoption and convergence
with International Financial Reporting Standards (IFRS). In addition, this study can be used as a reference to compare the
incremental value relevance of disaggregated earnings from before and after the adoption of IFRS in India.
Practically, this study provides several implications for the managers, investors, and creditors who have long been con-
cerned about the financial statements of firms. Financial statements provide a platform to convey a manager’s private
information to investors, but national GAAP restrictions can hinder it. To potentially minimize the information asymmetry
between managers and investors, this study provides guidance to managers in making the right choice of accounting treat-
ments for investments in intangible assets by considering the intangible intensity nature of the firm. Voluntary disclosers on
accruals should provide more information to investors in intangible intensive firms. As there is a lack of symmetry between
the book and the market value of the equity, our study’s findings provide guidance to investors and creditors to minimize
this asymmetry. This should help them to make better investment decisions and to evaluate financial statements with the
P. Kumari and C.S Mishra / Journal of International Accounting, Auditing and Taxation 39 (2020) 100321 3
consideration of the operational nature of the firm (intangible intensive or non-intangible intensive). Investors can consider
the nature of intangible intensity as an additional factor while judging reported earning components for estimating equity
values and future earnings. For instance, what do accruals reported due to the amortization of the investment cost associated
with the creation of intangible assets signal about a firm’s future growth prospects. This is more important for intangible
intensive firms than for non-intangible intensive firms.
The rest of the study follows this structure: Section 2 includes information about intangible intensity and the market in
India. Section 3 includes the literature review and hypotheses. Section 4 explains the research design. Section 5 is the sample
description. Section 6 explains the results. Section 7 presents the summary, conclusion, and implications of the study.
2. Market and Intangible Intensity in India
The world economy is shifting to intangible-intensive firms from tangible-intensive firms. Further, every year Brand
Finance conducts a study to analyze the fluctuations in the value of intangible assets on the world stock market and produces
the annual GIFT report. According to the 2017 GIFT report, 36 percent of the world’s enterprise value is generated from
undisclosed intangible assets. For countries with intangible assets, India ranked 13th of all countries and ranked third most
among emerging countries, with a score of 49 percent in tangible net assets, 6 percent in disclosed intangible assets, 2 percent
in disclosed goodwill, and 43 percent in undisclosed value measured in terms of total enterprise value. This indicates a high
rate of unrecognized intangible assets. This also indicates that India is an ideal platform to examine the effect that intangible
intensity has in an emerging market on the incremental value relevance of disaggregated earnings over aggregated earnings.
In addition, the World Intellectual Property Organization (WIPO) in 2017 reported that India is evolving as a forerunner
in economical and demand-driven invention among various world economies. India ranked second for adding high-quality
scientific research globally and ranked as the third highest investment destination for technology transactions in the globe.
Further, India ranked ninth in number of scientific publications and twelfth for the greatest number of patent applications.
India ranked 57th in the global innovation index in 2018.
Numerous industries possess a high proportion of intangible assets, including computer technology, information tech-
nology (IT), healthcare, pharmaceuticals, chemicals, telecommunication, and consumer products and services (Haskel &
Westlake, 2018; Zhao, 2002). India is also shifting to a service-based economy from an agrarian one. The service sector was
one of the fastest growing sectors of Indian economy in 2015-16, contributing around 57 percent of Gross Domestic Product
(GDP). Furthermore, as per the Indian Economic Survey 2015-16 (Ministry of Finance, 2015–2016Ministry of Finance, -,
2016Ministry of Finance, 2015–2016), India’s service sector is the most rapidly growing in the world with its compound
annual growth rate of 8.6 percent during 2010 to 2014. Services are intangible goods and represent a substantial portion of
an economy’s intangible intensity.
In 2018, the India Brand Equity Foundation (2018) reported that IT is a significant service sector industry of Indian
economy. The major components of the IT industry are business process outsourcing and IT services. The contribution
this industry made to GDP increased from 1.2 percent in 1998 to 7.7 percent in 2016-17, which makes India the eighth
largest service exporter in the world. India’s cost of providing IT services is around 3-4 times lower than in the US, which
continues to be its unique selling proposition in the world’s economy. In addition, India ranked at the top in the export of
communication and information technology and second in quality of innovation. Additionally, India has the second largest
telecommunication market and third highest number of internet users across the globe (India Brand Equity Foundation,
2018).
The pharmaceutical industry is another major contributor to the Indian economy. As of March 2018, the IBEF reported
high growth in the pharmaceutical industry for the last decade. In India, the production cost is approximately 33 percent
lower than the US. India ranked second in terms of the manufacturing plants approved by the United States Food and Drug
Administration (USFDA) outside the US. Globally, the largest provider of generic drugs is India. The Indian pharmaceutical
sector industry supplies over 50% of global demand for various vaccines, 40% of generic drug demand in the US, and 25% of
all medicine in the UK. In addition, India is third largest producer of chemicals in Asia.
3. Related Literature and Hypotheses
Prior studies (Barth et al., 1999, 2005; Farshadfar & Monem, 2013; Lev, 1989; Wilson, 1986, 1987) investigated value
relevance of accruals and cash flow and reported that both accruals and cash flows components of earnings have incremental
information power to explain the market value of equity and earning persistence. Dechow (1994) found that accruals have a
higher value relevance compared to earnings and cash flows. However, the findings of Ball et al. (2016) were inconsistent to
the findings of Dechow (1994). Further, according to the Concept Statement 8 of the FASB, the financial statement, which is
the primary emphasis, should be on accruals because accrual-based accounting is considered a superior indicator of present
and future earnings and earning components. Additionally, Barth et al. (1999, 2005) determined the disaggregated earnings
(accruals and cash flows) provide further noteworthy information over aggregated earnings to describe the market value of
equity and persistence of earnings.
Generalization of such conclusions in emerging markets is still dubious because there are significant differences between
the developed and developing markets. This is a result of continually changing institutional settings, including reporting
systems, disclosures, laws, regulations, and the general institutional environment (Chen et al., 2001; Haw, Qi, & Wu, 2001;
Qu & Zhang, 2015). According to Sharma and Kennedy (1977), compared to developed markets, the Indian capital market
(emerging market) is small, dynamic, and inefficient. Further, Gupta (1990) supported the findings of Sharma and Kennedy
(1977) and concluded that emerging capital markets are subject to various institutional factors. In addition, Yao, Percy,
Stewart, and Hu (2017) concluded that institutional factors affect earning persistence significantly. Thus, the following is
hypothesized:
H1. A change in institutional settings from a developed market to an emerging market has a significant impact on the incremental
value relevance of disaggregated earnings over aggregated earnings that explains a) equity values and b) future earnings.
Further, some studies based on the emerging market specifically examined the incremental explanatory power of dis-
aggregated earnings over aggregated earnings and supported the argument of Sharma and Kennedy (1977) that emerging
markets are inefficient. For instance, Haw et al. (2001) reported a negligible difference in the incremental explanatory power
of disaggregated earnings (accruals as well as cash flows) over the explanatory power of aggregated earnings in China. Further,
in Palestine, Daraghma (2010) found insufficient evidence of incremental explanatory power of cash flows over earnings.
Even in India, Dawar (2014) concluded in his study based on BSE 30 firms that Indian investors cannot judge aggregated
earnings and disaggregated earnings separately to explain the market value of equity and earning persistence. Further, he
concludes that Indian investors are not able to differentiate between the value relevance of cash flows and accruals. Thus,
the following is hypothesized:
H2. In India, disaggregated components of earnings have no significant incremental value relevance over aggregated earnings
to explain a) equity values, and b) future earnings.
H3. In India, there is no significant difference between the value relevance of cash flows and accruals to explain a) equity values,
and b) future earnings.
In addition, to compare the informative ability of accruals and cash flows, the previous literature discussed various
factors affecting their informative ability, such as business life cycle (Black, 1998), temporal increment in one-time or non-
operating items (Bushman, Lerman, & Zhang, 2016), temporal change in corresponding revenue and expenses (Dichev &
Tang, 2008), untimely recognition of profit and loss (Ball & Shivakumar, 2006), and the rise of intangible intensity (Srivastava,
2014). Collins et al. (1997) reported that growing intangible intensity affects properties of earning and book value of equity.
Srivastava (2014) found that due to increments in the intangible intensity of firms, the fundamental properties of earnings
are changing over time. Further, based on the US market where capitalization of investments in intangible assets is not
allowed, Bushman et al. (2016) concluded that the growth of intangible intensive industries causes a temporal decline in
the negative link between cash flows and accruals. However, Lev and Nissim (2006) found that firms with high accruals
are characterised by low book-to-market ratios, high intangible intensity, and high growth. In addition, Thi and Schultze
(2011) claimed that the accruals generated through the capitalization of investments in intangible assets adds significant
explanatory power to earnings. Supporting that study, Shust (2015) concluded that the marginal adverse reaction of investors
on discretionary accruals is less significant in intangible intensive firms. Therefore, for intangible intensive compared to non-
intangible intensive firms, it would be logical to assume varying informative abilities of accruals and cash flows to explain
equity values, forthcoming earnings, and their persistence quality. Thus, the following is hypothesized:
H4. In India, there is a significant difference in incremental explanatory power of disaggregated earnings over aggregated earnings
between intangible-intensive and non-intangible intensive firms to explain a) equity values, and b) future earnings.
H5. In India, the persistence properties of disaggregated earning components are different between intangible intensive and
non-intangible intensive firms.
4. Research Design
Following Barth et al. (1999, 2005), this study adopts the generalised framework of the Ohlson (1995, 1999) model. This
model includes an interconnected assembly of equations consisting of predictive and valuation links for the market value of
equity and earning persistence, referred to as the LIM structure (Barth et al., 2005; Dechow, Hutton, & Sloan, 1999; Myers,
1999; Ohlson, 1995). We examine the effects of disaggregated earnings, such as accruals and cash flows, in India’s capital
market using a generalized statistical model of LIM connectivity.
First, the study incorporated LIM1 adopted from Barth et al. (2005), based on the Ohlson (1995) LIM structure and compris-
ing a structure of equations. Equations 1a to 1c are predictive links and 1d is the valuation link derived by linear information
dynamics of predictive links equations. For example, in the valuation link equation of Ohlson (1995), the coefficient of abnor-
mal earnings is a nonlinear function of the coefficient of predictive link discount rate and abnormal earnings. Here, Ohlson
(1995) showed an association between predictive and valuation links. Following Barth et al. (2005), the LIM connectivity has
not been imposed in this study, because the results of Barth et al. (2005) claimed the effectiveness of analysis of statistically
estimated results founded on the Ohlson (1995) model does not implement the LIM structure given in model. However, the
study followed it for LIM2.
AE it = ω10 + ω11 AE it−1 + ω12 BVE it−1 + ω13 vit−1 + ε1it (1a)
BVE it = ω20 + ω22 BVE it−1 + ε2it (1b)

vit = ω30 + ω33 vit−1 + ε3it (1c)
MVE it = ˛0 + ˛1 AE it + ˛2 BVE it + ˛3 vit + it (1d)
Where MVE is the market value of equity, BVE is the book value of equity, ε and are the error terms, and v is the other
information, defined as MVE t−1 − MVE ¯ t−1 , where MVE ¯ t−1 is the fitted value of MVE t−1 based on the valuation link of the
LIM1 structure, i.e. equation 1(d), without the inclusion of vt . Equation (1d)’s accounting variables do not explain the market
value of equity Ohlson (1995). Abnormal earnings (AE) are calculated by following Ota (2002) criteria. AE (earnings before
extraordinary items minus expected normal earnings) is defined as AE it = Eit − rit (BVE it−1 ), where E is earnings for the
period, rit is the estimated cost of equity capital for firm I. In year t, which is defined as rit = rf t + ˇit (rmt − rf t ), where rf t
is the yearly average rate of return on a five-year Indian government bond, ˇit is estimated CAPM beta for firm i in year t,
which is estimated using a rolling regression process with a 60-month window against the BSE Sensex Index. And rmt − rf t
is the market risk premium, which is the average difference of the yearly average market rate of return (based on BSE Sensex
Index) and the yearly average risk-free rate of return (based on a five-year Indian government bond) from 2002 to 2015.
LIM1 consists of aggregate earnings and plays a major part in the past empirical literature of value relevance of accounting
information (Bernard, 1995; Dechow et al., 1999; Lundholm, 1995; Myers, 1999). Our study considers abnormal earnings
as an indicator of aggregated earnings. Vast empirical literature is based on the statistical specifications of LIM1in order to
measure the value relevance quality of accounting information (Barth et al., 2001; Collins et al., 1997; Holthausen & Watts,
2001) and to evaluate the theoretical value of equity stocks (Frankel & Lee, 1998; Lee, Myers, & Swaminathan, 1999).
For LIM2, the study adopts Barth et al. (1999, 2005) based on Ohlson (1999), where the disaggregated components of
earnings (accruals and cash flows) are included. Ohlson (1999) modeled the variable of disaggregated components of earnings
by way of transitory earnings. This applies to any earning component (Barth et al., 1999). LIM2 consists of accruals and cash
flow systems of equations, where LIM2i represents the accrual system and LIM2ii represents cash flow systems (Barth et al.,
1999). Both systems contain predictive and valuation link equations. The study assesses LIM2 because past studies suggest
the capacity to predict forthcoming earnings and describe cross-sectional disparity in the market value of equity is different
between cash flow and accruals components of earnings (Barth et al., 2001; Dechow, 1994; Sloan, 1996).
Accruals system equations:
AE it = ω10 + ω11 AE it−1 + ω12 ACC it−1 + ω13 BVE it−1 + ω14 vit−1 + ε1it (2ia)
ACC it = ω20 + ω22 ACC it−1 + ω23 BVE it−1 + ε2it (2ib)
BVE it = ω30 + ω33 BVE it−1 + ε3it (2ic)
vit = ω40 + ω44 vit−1 + ε4it (2id)
MVE it = ˛0 + ˛1 AE it + ˛2 ACC it + ˛3 BVE it + ˛4 vit + it (2ie)
Cash flow system equations:
AE it = ω10 + ω11 AE it−1 + ω12 CFOit−1 + ω13 BVE it−1 + ω14 vit−1 + ε1it (2iia)
CFOit = ω20 + ω22 CFOit−1 + ω23 BVE it−1 + ε2it (2iib)
BVE it = ω30 + ω33 BVE it−1 + ε3it (2iic)
vit = ω40 + ω44 vit−1 + ε4it (2iid)
MVE it = ˛0 + ˛1 AE it + ˛2 CFOit + ˛3 BVE it + ˛4 vit + it (2iie)
ACC is the accruals defined as earnings before extraordinary income minus cash flows from operations (CFO). For vit , a
similar procedure using LIM1 to calculate “other information” has been followed.
5. Data and Descriptive Statistics
5.1. Data and Sample selection
The sample is from the Centre for Monitoring of Indian Economy (CMIE) ProwessIQ database, and for the financial years
that ended in 2002 to 2015. In India, the accounting standard for the presentation of cash flow statement (i.e. AS3) was
mandatory from April 1, 2001. Thus, the study duration starts from the fiscal year ended on March 31, 2002.
The sample has the following criteria:
(1) Throughout the study period, the sample firm must be in the listed category of the BSE.
(2) Financial firms and electricity generating utility firms are excluded.
(3) Data and information to estimate all LIM equations must be available with the CMIE ProwessIQ database.
(4) Total assets and owners’ equity must be greater than zero.
Fig. 1. Yearly correlation (Corr) between accruals and cash flow from operation for intangible intensive firms (int) and non-intangible intensive firms
(Nint).
All measured variables are taken at the end of the fiscal year. The data collection process produces a total 541 firms
with 7,574 firm-year observations. Further, studying changes in the value relevance of earnings and earnings components to
explain equity values and the persistence quality of earnings and earnings components with intangible intensity, led to group-
wise panel regressions being performed. We divided the firms into two groups: intangible and non-intangible intensive.
Any firm that met one of the following National Industrial Classification (NIC) codes was considered intangible-intensive:
Division 20 chemicals and chemical products; Division 21 pharmaceuticals, medicinal chemical and botanical products;
Division 22 rubber and plastics products; Division 26 computer, electronic and optical products; Section J information and
communication; Section M professional, scientific and technical activities; or Section N administrative and support service
activities. The classification criteria are similar to what Collins et al. (1997) used to select intangible-intensive firms based
on Standard Industrial Classification (SIC) codes. Using specified definitions of codes and expert consultations, we brought
NIC codes into line with SIC codes. This classification process yields 179 intangible and 362 non-intangible intensive firms.
For a better comparative analysis over the long run, the total time span of 14 years (2002-2015) was divided into three
short periods based on different phases of change in institutional settings and market environments. This division facilitates
the investigation of period-specific impacts on the value relevance of aggregated and disaggregated earnings. Period 1 or P1
(2002-2006) is considered the introductory period because reporting of cash flow statements under AS 3 became mandatory
in India on April 1, 2001.
In 2005, India became Trade Related Aspects of Intellectual Property Rights (TRIPS)-compliant, and product patents
were extended to all fields of technology. This means that the first financial statements after becoming TRIPS-compliant
came in 2006. We exclude 2006 from the analysis in order to provide a one-year cushion to capture the impact of TRIPS-
compliance. This is important because recording the impact of TRIPS-compliance is expected to increase capitalized research
and development (R&D) costs, and instant investment in capital expenditures is rare. Moreover, the capitalized R&D cost
is one of the important accrual-generating expenditure in terms of amortization for intangible intensive firms. In addition,
the yearly correlation coefficient statistics given in Fig. 1 supports this period allocation from 2007. Thus, Period 2 or P2
(2007-2011) is considered the period in which large amounts of accrual reporting is expected for intangible intensive firms
in comparison to non-intangible intensive firms.
From April 1, 2011, it became mandatory that financial statements are prepared in accordance with the revised schedule
VI. Revised schedule VI specifies the manner in which firms prepare and present financial statements. The major change under
revised scheduled VI was the presentation of current and non-current items under separate headings. Current items consist
of major accrual components, such as account receivables, account payables, inventories, and depreciation or amortization.
Thus, we use Period 3 or P3 (2012-2015) to examine the impact of revised schedule VI. P3 ends in 2015 because starting
from April 1, 2015 voluntary adoption of IndAS was allowed. IndAS are the Indian accounting standards aligned with IFRS.
5.2. Descriptive statistics
Table 1 depicts summary statistics for measures of the variables used in the regression estimation of all LIMs. Panel A (B)
shows descriptive statistics for all (intangible intensive and non-intangible intensive) sample firms. Descriptive statistics
show that the book value to equity is less than the market value of equity in all three groups of firms (all, intangible intensive,
and non-intangible intensive). This infers that the book value of equity cannot clarify the market value of equity, showing
consistency with previous studies (Barth et al., 1999, 2001, 2005; Sloan, 1996). Additionally, the average book value of
equity is 29.04% (43.96%) of market value of equity in intangible (non-intangible) intensive firms. These statistics support
our sample distribution as intangible and non-intangible intensive firms. Further, Panel A shows that in all three groups of
firms, the average accrual is negative and average cash flow is positive, which aligns with previous studies (Barth et al., 1999,
2005; Sloan, 1996).
Table 1
Descriptive Statistics (in INR millions)
Panel A. Descriptive Statistics for the total sample of 541 Indian listed firms, 2002-2015.
Variable Name Mean Median Standard Deviations

MVE (market value of equity) 34,274.35 1,763.60 175,307.90
BVE (book value of equity) 13,557.67 1,575.20 75,341.31

AE (abnormal earnings) 477.61 −1.05 5,902.49
ACC (total accruals) −884.78 −132.50 10,113.28
CFO (cash flows from operations) 2,717.31 282.45 17,576.89
v (other information) −1,990.11 −248.69 51,807.80
Panel B. Descriptive Statistics for the sample of 179 Indian listed intangible intensive and 362 Indian listed non-intangible intensive firms, 2002-2015.
Mean Median Standard Deviations
Intangible Non- Intangible Intangible Non- Intangible Intangible Non- Intangible

intensive firms intensive firms intensive firms intensive firms intensive firms intensive firms
MVE (market value of equity) 30,607.03 36,088.76 1,903.82 1,702.41 117,910.89 197,608.43
Test of difference −5481.73 201.40**
BVE (book value of equity) 8,891.25 15,865.09 1,786.30 1,490.15 24,464.43 90,397.35
Test of difference −6973.84*** 296.15**
AE (Abnormal earnings) 270.64 579.95 1.62 −2.28 4,036.14 6,632.10
Test of difference −309.31** 3.90**
ACC (total accruals) −514.87 −1,067.71 −129.80 −133.45 4,459.55 11,955.30
Test of difference 552.890** 3.65
CFO (cash flow from operations) 1,641.87 3,249.08 318.95 269.65 6,150.23 21,028.29
Test of difference −1607.21*** 49.30***
v (other information) −2,974.40 −1,503.40 −224.92 −265.03 40,675.10 56,505.43
Test of difference −1471.00 40.11
Notes: INR stand for Indian Rupee. Test of difference is based on t-tests for the means and Wilcoxon signed-ranks test for the medians. ***, **, and * indicates
significance at 1%, 5%, and 10%, level or better, respectively.
Moreover, the t-test was performed to examine the difference in mean, and the Wilcoxon signed rank test was done
to examine the difference in the median for all variables between intangible intensive and non-intangible intensive firms.
Results indicate that the average of all variables (except other information) is higher in non-intangible intensive firms
compared to intangible intensive firms. But the average of other information is higher in intangible intensive firms compared
to non-intangible intensive firms. This indicates that after considering only abnormal earnings and the book value of equity,
the unexplained market value of the firm is higher in intangible intensive firms compared to non-intangible intensive firms.
Further, results indicate that for all variables the mean of two groups (intangible intensive and non-intangible intensive
firms) are significantly different. Additionally, results indicate that for all variables (except other information and accruals)
the median of two groups (intangible intensive and non-intangible intensive firms) are significantly different.
The Pearson correlations are in Table 2 for all variable measures applied in the estimation of all LIM structure equations.
Panel A (B) presents the correlation coefficient for all (intangible intensive and non-intangible intensive) sample firms. Results
indicate that the correlation coefficient between the market value of equity, book value of equity, and abnormal earnings
is significantly positive in both intangible and non-intangible intensive firms, but the degree of correlation coefficients is
higher in non-intangible intensive firms compared to intangible intensive. The results indicate that the positive relationship
between the market value of equity, the book value of equity, and abnormal earnings is stronger in non-intangible intensive
firms compared to intangible intensive firms.
Results show that in non-intangible intensive firms the correlation coefficient of accruals with all other variables is notably
negative (except other information). Whereas in intangible intensive firms the correlation of accruals is notably negative,
with the book value of equity and cash flows otherwise positive. This indicates that the market value of equity and abnormal
earnings increases (decreases) with increment in accruals, in intangible (non-intangible) intensive firms. Additionally, results
show a significant positive correlation coefficient between cash flows and all other variables (except accruals) in both
intangible and non-intangible intensive firms. But the degree of correlation coefficients is higher in non-intangible intensive
firms than intangible intensive firms. Thus, the relation between accruals (cash flows) and other variables is opposite (similar)
between intangible intensive and non-intangible intensive firms. However, the degree of negative correlation coefficient
between accruals and cash flows is less in intangible intensive firms (-0.569) compared to non-intangible intensive firms
(-0.807). These results support the findings of Lev and Nissim (2006); Shust (2015); Hao and Li (2016), and Bushman et al.
(2016).
On the other hand, the degree of correlation coefficients between other information and all other variables (except cash
flows) is higher in intangible intensive firms compared to non-intangible intensive firms. This indicates that the relation
between other information and all other variables is stronger in intangible intensive firms compared to non-intangible
intensive firms. However, the correlation coefficient amid other information and cash flows is not significant.
Table 2
Correlation coefficients
Panel A: Pearson correlation coefficients for the total sample of 541 Indian listed firms, 2002-2015.
MVE BVE AE ACC CFO v
MVE (market value of equity) 1

BVE (book value of equity) 0.836*** 1
AE (abnormal earnings) 0.635*** 0.452*** 1
ACC (total accruals) −0.331*** −0.439*** −0.074*** 1
CFO(cash flows from operations) 0.757*** 0.841*** 0.543*** −0.793*** 1
v (other information) 0.221*** 0.022*** 0.102*** 0.054*** 0.004*** 1
Panel B: Pearson correlation coefficients for the sample of 179 intangible intensive Indian listed firms and 362 non-intangible intensive Indian
listed firms, 2002-2015.
Intangible intensive firms MVE BVE AE ACC CFO v

ACC (total accruals) 0.044** −0.051** 0.294*** 1
v (other information) 0.257*** 0.066*** −0.169*** 0.089*** −0.165 1
Non- Intangible intensive firms MVE BVE AE ACC CFO v

ACC (total accruals) −0.376*** −0.459*** −0.116*** 1
v (other information) 0.214*** 0.018* 0.161*** 0.051*** 0.021 1
Notes: ***, **, and * indicate significance at 1%, 5%, and 10%, level or better, respectively.
Fig. 1 displays the yearly correlation between accruals and cash flows relating to intangible intensive and non-intangible
intensive firms. The yearly correlation between cash flows and accruals is negative in every year, due to the inherent property
of temporary mismatch in operating cash flows of accrual accounting. Moreover, consistent with prior research, the negative
correlation between accruals and cash flow of intangible (non-intangible) intensive firms is decreasing (increasing) over
time, indicating that in intangible intensive firms the fundamental properties of earning components are changing over
time (Bushman et al., 2016).
6. Results and Findings
6.1. Valuation Link Equations
Table 3 presents period-wise regression summary statistics that correspond to the valuation link equations of aggregated
earnings and disaggregated earnings systems for all, intangible-intensive, and non-intangible intensive sample firms. Panel
A represents the regression estimates of the valuation link of aggregated earnings (Eq.1d) from P1 to P3.
In LIM 1 of P1 (2002-2006), the standardized coefficients of abnormal earnings (˛1 ), the book value of equity (˛2 ),
and other information (˛3 ) for all firms are positively significant and 0.738, 0.423, and 0.005, respectively. In addition,
˛1 , ˛2 , and ˛3 for intangible and non-intangible intensive firms are also positively significant, 8.992, 1.892, and 0.039, and
0.683, 0.427, and 0.005, respectively. The non-zero coefficients of variables indicate the incremental information contents of
respective variables. In all three groups, the standardized coefficients of all three variables are greater than zero, indicating
their incremental information content in order to explain equity values. In addition, the incremental information content
of abnormal earnings is the highest, trailed by the book value of equity and other information in each of the three groups.
It indicates that in P1, the market provided the highest weight to abnormal earnings, followed by the book value of equity
and other information in valuation of the firms irrespective to the nature of the intangible intensity of the firm. However,
the difference in incremental information content of abnormal earnings and book value of equity is high in intangible
intensive firms compared to non-intangible intensive firms. Further, the explanatory power of eq.1d indicates a combined
value relevance of abnormal earnings, the book value of equity, and additional information to determine equity values. The
explanatory powers of eq.1d for all, intangible intensive, and non-intangible intensive firms are 0.639, 0.367, and 0.675,
respectively. These results suggest that in P1 the combined value relevance of abnormal earnings, the book value of equity,
and other information of non-intangible intensive firms is higher than intangible intensive firms to explain equity values
(0.675 > 0.367).
Further, Panel B discloses the regression estimates of the valuation link of disaggregated earnings equations of LIM2, i.e.
accruals (eq.2ie) and cash flow (eq.2iie) systems. For all firms, the coefficients of both accruals and cash flows are significantly
different from zero (-0.126 and 0.119), indicating their incremental information content to explain equity values. Moreover,
Table 3
Period-wise regression statistics of equity valuation link.
P. Kumari and C.S Mishra / Journal of International Accounting, Auditing and Taxation 39 (2020) 100321
Model 1d: MVEit = ˛0 + ˛1 AEit + ˛2 BVEit + ˛3 vit + it
2
Periods Sample Size ˛1 AE (abnormal earning) ˛2 BVE (book value of equity) ˛3 v(other information) Adj R
Intangible intensive 2002-2006 179 8.992*** 1.892*** 0.039*** 0.367

firms 2007-2011 179 2.133*** 2.429*** 0.050*** 0.414
2012-2015 179 1.236*** 2.446*** 0.025*** 0.736
Pooled 179 1.548*** 2.099*** 0.018*** 0.792
Non-Intangible 2002-2006 362 0.683*** 0.427*** 0.005*** 0.675
intensive firms 2007-2011 362 1.415*** 0.047*** −0.004*** 0.536
2012-2015 362 0.102*** 0.037*** 0.003*** 0.264
Pooled 362 0.579*** 0.013*** 0.005*** 0.727
All firms 2002-2006 541 0.738*** 0.423*** 0.005*** 0.639
2007-2011 541 1.097*** 0.045*** −0.003*** 0.493
2012-2015 541 0.065 0.056*** 0.005*** 0.370
Pooled 541 0.524*** 0.014*** 0.005*** 0.724
Accruals System Cash Flows System
Model 2ie: MVEit = ˛0 + ˛1 AEit + ˛2 ACCit + ˛3 BVEit + ˛4 vit + it Model 2iie: MVEit = ˛0 + ˛1 AEit + ˛2 CFOit + ˛3 BVEit + ˛4 vit + it
2 2
Periods Sample Size ˛1 AE ˛2 ACC ˛3 BVE ˛4 v Adj R % Inc. ˛1 AE ˛2 CFO ˛3 BVE ˛4 v Adj R %Inc.
Intangible intensive 2002-2006 179 10.400*** −2.850*** 1.955*** 0.039*** 0.394 7.357 6.504*** 2.919*** 1.804*** 0.040*** 0.395 7.629
firms 2007-2011 179 2.459*** −0.098*** 2.427*** 0.054*** 0.424 2.415 2.080*** 0.100*** 2.406*** 0.055*** 0.423 2.174
2012-2015 179 1.907*** −0.596*** 2.433*** 0.025*** 0.756 2.717 0.804*** 0.754*** 2.427*** 0.026*** 0.753 2.310
Pooled 179 1.773*** −0.296*** 2.095*** 0.018*** 0.807 1.894 1.319*** 0.283*** 2.091*** 0.018*** 0.806 1.768
Non-Intangible 2002-2006 362 0.678*** −0.111*** 0.433*** 0.004*** 0.678 0.444 0.601*** 0.105*** 0.425*** 0.004*** 0.678 0.444
intensive firms 2007-2011 362 1.432*** −0.038*** 0.052*** −0.004*** 0.539 0.560 1.604*** 0.029*** 0.058*** −0.004*** 0.541 0.933
2012-2015 362 0.084** −0.008* 0.037*** 0.003*** 0.267 1.136 0.101*** 0.012*** 0.037*** 0.003*** 0.269 1.894
Pooled 362 0.613*** −0.017*** 0.013*** 0.005*** 0.728 0.138 0.569*** 0.017*** 0.016*** 0.005*** 0.728 0.138
All firms 2002-2006 541 0.735*** −0.126*** 0.430*** 0.005*** 0.641 0.313 0.641*** 0.119*** 0.421*** 0.005*** 0.641 0.313
2007-2011 541 1.095*** −0.026*** 0.049*** −0.003*** 0.495 0.406 1.211*** 0.021*** 0.054*** −0.003*** 0.496 0.609
2012-2015 541 0.050 −0.007 0.058*** 0.005*** 0.372 0.541 0.065 0.010*** 0.059*** 0.005* 0.373 0.811
Pooled 541 0.557*** −0.019*** 0.014*** 0.005*** 0.726 0.276 0.514*** 0.019*** 0.016*** 0.005*** 0.726 0.276
Notes: MVE is the market value of equity, BVE is book value of equity, AE is abnormal earnings, ACC is total accruals, CFO is cash flows from operations, and v is other information. Panels A and B estimations are
based valuation link of LIM1, LIM2i, and LIM2ii. The separate industry and pooled regression are estimated with year fixed effect. ***, **, and * indicates significance at 1%, 5%, and 10%, level or better, respectively.
9
in the accrual system the coefficients of accruals for intangible intensive (-2.850) and non-intangible intensive (-0.111) firms
are negatively significant. Whereas, in cash flow systems, the coefficients of cash flow for intangible intensive (2.919) and
non-intangible intensive (0.105) firms are positively significant. This indicates a negative (positive) impact of accruals (cash
flows) on equity values, irrespective to the nature of the intangible intensity of the firm. The negative (positive) signs of
coefficients of accruals (cash flows) align with previous literature (Barth et al., 1999, 2005).
The explanatory powers of both valuation equations of LIM2, i.e. eq.2ie and eq.2iie, in intangible intensive are 0.394 and
0.395, and in non-intangible intensive firms are 0.678 and 0.678. Column nine and eleven present the percentage increment in
adjusted R2 from aggregated earnings valuation equations (eq.1d) to disaggregated earnings valuation equations, i.e. accruals
(eq.2ie) and cash flows (eq.2iie) respectively. The percentage increment in adjusted R2 from aggregated to disaggregated
equations indicates the incremental explanatory power of disaggregated earnings over aggregated earnings. In intangible
intensive firms, the percentage increment in adjusted R2 from aggregated to disaggregated systems is 7.357 with accruals and
7.629 with cash flows. However, in non-intangible intensive firms, the percentage increment in adjusted R2 from aggregated
to disaggregated systems is the same with both accruals and cash flow systems (adjusted R2 = 0.313). The results indicate that
the percentage increment in adjusted R2 from aggregated to disaggregated earnings is higher in intangible intensive firms’
than in non-intangible intensive firms to explain equity values. However, in intangible intensive firms, the incremental
percentage is higher in cash flow systems compared to accrual systems. Whereas, in non-intangible intensive firms, the
incremental percentage is the same in both accrual and cash flow systems. In P1, the results for intangible intensive firms
are in line with developed capital markets (Barth et al., 2005), whereas the results for non-intangible intensive firms are
consistent with previous results based on the Indian market (Dawar, 2014).
Further, in LIM1 from P1 to P2, for intangible intensive firms, the coefficients of abnormal earnings decreased (8.992 to
2.133), whereas the coefficient of the book value of equity (1.892 to 2.429) and other information (0.039 to 0.050) increased.
On the other hand, for non-intangible intensive firms, the coefficients of abnormal earnings increased (0.683 to 1.415),
whereas the coefficient of the book value of equity (0.427 to 0.047) and other information (0.005 to -0.004) decreased.
In intangible intensive firms, the comparative results of P1 and P2 indicates the valuation weight decreases on abnormal
earnings and increases on the book value of equity and other information, and vice versa for non-intangible intensive firms.
These results are consistent with Collins et al. (1997), i.e. with incremental intangible intensity of the firms, the incremental
value relevance of earnings is substituted by the incremental value relevance of the book value. This is because accounting
standards restrict capitalization of research and development cost, which results in less value relevance of earnings. In
addition, Collins et al. (1997) stated the value relevance of earnings and book value changes in opposite manner and the
value relevance of the book value increases. Further, compared to P1, the adjusted R2 of eq.1d of intangible (non-intangible)
intensive firms increases from 0.367 to 0.414 (decreases from 0.675 to 0.536) in P2. P2 is the period when India became
TRIPS-compliant, which results in greater opportunities through R&D investment, followed by more recognition of R&D
costs through the capitalization of R&D expenditures. Thus, after the TRIPS agreement, intangible intensive firms capitalize
their R&D costs at a higher level, which results in an incremental increase in the value relevance of accounting information.
Further, in disaggregated earnings equations of P2, the magnitude of negative (positive) coefficients of accruals (cash flows)
decreases in both intangible and non-intangible intensive firms in comparison to P1. The results indicate that the investor’s
negative (positive) weight on accruals (cash flows) decreases in valuation of the firm in P2, irrespective of the intangible
intensity of the firm.
In intangible (non-intangible) intensive firms, the percentage increment in adjusted R2 from aggregated to disaggregated
systems is 2.415 (0.560) with accruals and 2.174 (0.933) with cash flows. Similar to P1, results of P2 indicate that the
percentage increment in adjusted R2 from aggregated to disaggregated earnings is higher in intangible intensive firms
compared to non-intangible intensive firms to explain equity values. However, in P2, for intangible intensive firms the
incremental percentage is higher in the accruals system compared to the cash flow system and vice versa for non-intangible
intensive firms. In P2, the results for intangible intensive firms support the prior literature stating that the accrual generated
in intangible intensive firms creates significant explanatory power to earnings (Thi & Schultze, 2011). In contrast, the results
for non-intangible intensive firms are consistent with previous results based on developed markets without the segregation
of firms as intangible and non-intangible intensive (Barth et al., 2005).
Further, in LIM1 of P3, the abnormal earnings (book value of equity) coefficients continued to decrease (increase). Whereas,
the coefficient of other information decreases compares to P2 for intangible intensive firms. In non-intangible intensive firms,
the coefficient of abnormal earnings and the book value of equity decrease, whereas the coefficient of other information
increases compared to P2. In intangible intensive firms, the comparative results of P2 and P3 indicate that the valuation
weight further decreases on abnormal earnings and increases on the book value of equity. But in non-intangible intensive
firms, the valuation weight on both abnormal earnings and the book value of equity decreases and the valuation weight
increases on other information. Similar to P2, these results match with Collins et al. (1997), i.e. with time, the incremental
value relevance of earnings is substituted by the incremental value relevance of the book value due to intangible intensity.
Further, compared to P2, the adjusted R2 of eq.1d of intangible (non-intangible) intensive firms increases from 0.414 to 0.736
(decreases from 0.536 to 0.264) in P3. The P3 is the period in which the revised schedule VI became mandatory for listed
firms. The application of revised schedule VI is a step towards IndAS. Further, according to a report by PricewaterhouseCooper
(2017), the adoption of IndAS would be favorable to the firms belonging to intangible intensive industries.
In disaggregated earnings equations of P3, the magnitude of negative coefficients of accruals increases in both intangible
intensive and non-intangible intensive firms compared to P2. Whereas the magnitude of positive coefficients of cash flows
also increases in intangible intensive and non-intangible intensive firms compared to P2. These results indicate that the
investor’s negative weight on accruals and positive weight on cash flows increased in the valuation of the firm in P3, irre-
spective to the intangible intensity nature of the firm. Further, in intangible (non-intangible) intensive firms, the percentage
increment in adjusted R2 from aggregated to disaggregated systems is 2.717 (1.136) with accruals and 2.310 (1.894) with
cash flows. The results of the percentage increment in adjusted R2 from aggregated to disaggregate earnings as well as the
comparative incremental percentage between the accrual system and cash flow system are similar to the previous period
for both intangible and non-intangible intensive firms.
Table 3 indicates a significant impact of change in institutional settings on the incremental value relevance of disag-
gregated earnings over aggregated earnings to explain equity values. Further, the table indicates that the disaggregated
components of earnings have significant incremental explanatory power over aggregated earnings to explain equity val-
ues. Also, a significant difference between accruals and cash flows explanatory power that explains equity was observed.
In addition, there exists a noteworthy difference in incremental explanatory power of disaggregated earnings over aggre-
gated earnings between intangible intensive and non-intangible intensive firms to describe equity values. Specifically, the
incremental explanatory power of disaggregated earnings to explain equity values is higher in intangible intensive firms
compared to non-intangible intensive firms. However, in intangible intensive firms, the incremental explanatory power of
the accrual system is higher than the cash flow system and vice versa for non-intangible intensive firms. Hence, H1 (a) is
supported, H2 (a) and H3 (a) are rejected, and H4 (a) is supported.
6.2. Predictive Link Equations
6.2.1. Abnormal earnings equations

Table 4 presents the period-wise regression estimates with respect to the predictive link equation of aggregated earn-
ings and disaggregated earnings systems for all, intangible intensive, and non-intangible intensive firms. Panel A discloses
regression estimates of predictive link of aggregated earnings (Eq.1a).
In LIM 1 of P1, for all firms the standardized coefficients of one year lagged abnormal earnings, with 1.226 (ω11 ) positively
significant. Whereas, both one year lagged book value of equity, 0.032 (ω12 ), and one year lagged other information, 0.000
(ω13 ) are not significant. In addition, abnormal earning (ω11 ) is positively significant for both intangible intensive firms
(9.832) and non-intangible intensive firms (1.217). The book value of equity (ω12 ) is negatively significant for intangible
intensive firms (-0.383) and not significant for non-intangible intensive firms (0.039). Further, the other information (ω13 )is
positively significant for intangible intensive firms (0.014) and not significant for non-intangible intensive firms (0.000).
Positive coefficients of both lagged abnormal earnings and lagged other information as well as the negative coefficients of
lagged book value of equity are in line with Barth et al. (2005). Coefficients other than zero indicate incremental information
content of respective variables in order to foresee future earnings. It indicates that in P1, investors provided the highest
weight to abnormal earnings compared to the book value of equity and other information to foresee future earnings of the
firms, irrespective to the level of a firm’s intangible intensity. Moreover, investors only considered other information to
predict future earnings in the intangible intensive firms. Further, the explanatory power of eq.1a indicates a combined value
relevance of abnormal earnings, book value of equity, and other information to determine future earnings for all, intangible
intensive, and non-intangible intensive firms, are 0.144, 0.217, and 0.144, respectively. The results demonstrate that in P1,
the combined value relevance of abnormal earnings, book value of equity, and other information in intangible intensive
firms is higher (0.217 > 0.144) compared to non-intangible intensive firms to explain future earnings.
Further, Panel B discloses the regression estimates of abnormal earnings predictive equations of LIM2, i.e. accrual (eq.2ia)
and cash flow (eq.2iia) systems. For all firms, the coefficients of both accruals and cash flows are significantly different from
zero (-0.681, 0.624), indicating their incremental information content to explain future earnings. Moreover, the coefficients of
accruals for intangible intensive (-3.332) and non-intangible intensive (-0.701) firms are negatively significant. Whereas, the
coefficients of cash flows for intangible intensive (3.447) and non-intangible intensive (0.639) firms are positively significant.
The negative (positive) signs of coefficients of accruals (cash flows) are consistent with prior literature (Barth et al., 1999,
2005; Dawar, 2014). The explanatory power of predictive equations of LIM2 i.e. 2ia and 2iia for intangible-intensive are
0.389 and 0.396, and for non-intangible intensive firms are 0.246 and 0.259. The ninth and eleventh columns present the
percentage increment in adjusted R2 from aggregated earnings predictive equations (1a) to disaggregated earnings predictive
equations, i.e. accruals (2ia) and cash flows (2iia), respectively. In intangible intensive firms, the percentage increment in
adjusted R2 from aggregated to disaggregated systems is 79.263 with the accruals and 82.488 with the cash flows. Similarly,
in non-intangible intensive firms, the percentage increment in adjusted R2 from aggregated to disaggregated systems is
70.833 with accruals and 79.861 with cash flows. The results indicate that in intangible intensive firms, the incremental
value relevance of disaggregated earnings is notably higher compared to non-intangible intensive firms. Moreover, the
incremental value relevance of accrual systems to predict future earnings is higher than cash flow systems, irrespective to
the nature of intangible intensity of the firm.
In LIM1 of P2, the coefficient of abnormal earnings decreases in intangible (9.832 to 4.245) and non-intangible (1.217 to
0.813) intensive firms. In intangible intensive firms, the negative coefficient of the book value of equity (-0.383 to -0.524) and
positive coefficient of other information (0.014 to 0.024) increases compare to P1, whereas in non-intangible intensive firms,
the coefficient of the book value of equity (-0.057) and abnormal earnings (-0.003) became notably negative. Results indicate
that the investors’ positive weight on other information increased for intangible intensive firms, whereas in non-intangible
12
Table 4
Period-wise regression statistics of abnormal earnings predictive link.
P. Kumari and C.S Mishra / Journal of International Accounting, Auditing and Taxation 39 (2020) 100321
Model 1d: AEit = ω10 + ω11 AEit−1 + ω12 BVEit−1 + ω13 vit−1 + ε1it
2
Periods N ω11 (AE, abnormal earnings) ω12 (BVE, book value of equity) ω13 (v, other information) Adj R
Intangible intensive 2002-2006 179 9.832*** −0.383*** 0.014** 0.217

firms 2007-2012 179 4.245** −0.524** 0.024*** 0.059
2012-2015 179 7.325*** −0.762*** −0.002 0.370
Pooled 179 3.093*** 0.000 0.000 0.489
Non-Intangible 2002-2006 362 1.217*** −0.039 0.000 0.144
intensive firms 2007-2012 362 0.813*** −0.057*** −0.003*** 0.355
2012-2015 362 2.205*** −0.119*** −0.003*** 0.371
Pooled 362 1.287*** −0.006*** 0.000 0.470
All firms 2002-2006 541 1.226*** −0.032 0.000 0.144
2007-2012 541 0.393*** −0.057*** −0.001*** 0.261
2012-2015 541 1.954*** −0.108*** −0.002*** 0.360
Pooled 541 1.184*** −0.006*** 0.000 0.467
Model 2ia: AEit = ω10 + ω11 AEit−1 + ω12 ACCit−1 + ω13 BVEit−1 + ω14 vit−1 + ε1it Model 2iia: AEit = ω10 + ω11 AEit−1 + ω12 CFOit−1 + ω13 BVEit−1 + ω14 vit−1 + ε1it
2 2
Periods N ω11 AE ω12 ACC ω13 BVE ω14 v Adj R % Inc. ω11 AE ω12 CFO ω13 BVE ω14 v Adj R % Inc.
Intangible intensive 2002-2006 179 12.532*** −3.332*** −0.255** 0.017** 0.389 79.263 7.009*** 3.447*** −0.410*** 0.017** 0.396 82.488
firms 2007-2012 179 5.025** −0.225 −0.519** 0.021*** 0.062 5.085 4.473** 0.228 −0.506** 0.023*** 0.061 3.390
2012-2015 179 6.795*** −0.820*** −0.685*** 0.002 0.418 12.973 8.574*** 0.658*** −0.651*** 0.003 0.426 15.135
Pooled 179 3.352*** −0.219*** 0.000 0.000 0.509 4.090 2.964*** 0.205*** −0.007*** 0.000 0.508 3.885
Non-Intangible 2002-2006 362 1.489*** −0.701*** −0.017 −0.001 0.246 70.833 1.651*** 0.639*** −0.037 0.000 0.259 79.861
intensive firms 2007-2012 362 0.812*** 0.009 −0.057*** −0.003*** 0.355 0.000 0.559*** −0.014 −0.059*** −0.003*** 0.356 0.282
2012-2015 362 2.188*** 0.079*** −0.126*** −0.002*** 0.377 1.617 2.098*** −0.125*** −0.121*** −0.002*** 0.383 3.235
Pooled 362 1.285*** 0.021*** −0.006*** 0.000 0.472 0.426 1.341*** −0.021*** −0.007*** 0.000 0.474 0.851
All firms 2002-2006 541 1.494*** −0.681*** −0.018 0.000 0.248 72.222 1.670*** 0.624*** −0.039 0.000 0.261 81.250
2007-2012 541 0.445*** 0.075 −0.057*** −0.001*** 0.268 2.682 0.304*** −0.074 −0.056*** −0.001*** 0.269 3.065
2012-2015 541 5.465*** 0.082** −0.322*** −0.006*** 0.361 0.278 5.070*** −0.147** −0.322*** −0.006*** 0.363 0.833
Pooled 541 1.195*** 0.011*** −0.006*** 0.000 0.468 0.214 1.230*** −0.011*** −0.007*** 0.000 0.469 0.428
Notes: MVE is the market value of equity, BVE is book value of equity, AE is abnormal earnings, ACC is total accruals, CFO is cash flows from operations, and v is other information. Panels A and B estimations are
based valuation link of LIM1, LIM2i, and LIM2ii. The separate industry and pooled regression are estimated with year fixed effect. *** and ** indicates significance at 1% and 5%, level or better, respectively.
intensive firms, investors negatively weight other information to predict future earnings. Further, compared to P1, the
adjusted R2 of eq.1a of intangible intensive firms decreased (0.217 to 0.059) and increased in non-intangible incentive firms
(0.144 to 0.355) in P2. In P2, India became TRIPS-compliant, which results in more opportunities through R&D investment
and recognition of R&D costs through the capitalization of R&D expenditures. The higher investment in R&D expenditures
result in less persistence of earnings because the additional risk associated with R&D expenditure causes a decline in the
persistence of abnormal earnings (Asthana & Zhang, 2006; Chan, Lakonishok, & Sougiannis, 2001; Wedig, 1990).
In disaggregated earnings equations of P2, the coefficients of both accruals and cash flows became not significant, irre-
spective to the nature of a firm’s intangible intensity. In intangible (non-intangible) intensive firms, the percentage increment
in adjusted R2 from aggregated to disaggregated systems is 5.085 (0.000) with accruals and 3.390 (0.282) with cash flows.
Similar to P1, results of P2 indicate that the percentage increment in adjusted R2 from aggregated to disaggregated earn-
ings is higher in intangible intensive firms compared to non-intangible intensive firms to explain future abnormal earnings.
However, in P2, for intangible intensive firms the incremental percentage is higher in the accruals system compared to the
cash flow system and vice-versa for non-intangible intensive firms.
In LIM1 of P3, the positive (negative) coefficients of abnormal earnings (book value of equity) increases in comparison
to P2 for both intangible and non-intangible intensive firms. The comparative results of P2 and P3 indicate the valuation
weight further increases on abnormal earnings and the book value of equity to foresee future earnings. The coefficients of
other information became insignificant (and remained negatively significant) in intangible (non-intangible) intensive firms
compared to P2. Moreover, in comparison to P2, the adjusted R2 of eq.1a of intangible intensive firms (0.059 to 0.370) and
non-intangible intensive firms (0.355 to 0.371) increased in P3. P3 is the period in which the revised schedule VI became
mandatory for listed firms. The application of revised schedule VI is a step towards IndAS. The results indicate that the
persistence property of earnings increases with the application of revised schedule VI.
Next, in disaggregated earnings equations of P3, the coefficients of accruals (cash flows) is significantly negative (positive)
in intangible intensive firms and vice versa in non-intangible intensive firms. The results indicate that in P3 the accruals (cash
flows) are negatively (positively) related to future abnormal earnings in intangible intensive firms and vice versa in non-
intangible intensive firms. The results regarding intangible (non-intangible) intensive firms are consistent (inconsistent)
with prior results found in developed markets (Barth et al., 1999, 2005). Our results correspond with the argument given in
past literature (Barth et al., 1999, p. 207), i.e. while predicting future abnormal earnings, the sign and magnitude of accruals
and cash flows can either be positive or negative because they depend on the accounting and economic environment in which
a firm operates. For example, as an accrual item increases in inventories, it can be signal of higher expectation of future sales
or it can be a signal of an unexpected decrease in demand. Moreover, in intangible (non-intangible) intensive firms, the
percentage increment in adjusted R2 from aggregated to disaggregated systems is 12.973 (1.617) with accruals and 15.135
(3.235) with cash flows in P3. Similar to P1 and P2, the results indicate that in intangible intensive firms, the increment in
predictive power of disaggregated earnings is significantly higher than in non-intangible intensive firms to predict future
abnormal earnings in P3. Moreover, the incremental predictive power of cash flow systems is higher than accruals systems,
irrespective to the nature of intangible intensity of the firm to predict future earnings. The results of a percentage increment
in adjusted R2 from aggregated to disaggregate earnings and the comparative incremental percentage between accrual
system and cash flows system are similar to previous periods for intangible and non-intangible intensive firms (except P2),
in which for intangible intensive firms the incremental percentage is higher in the accruals system compared to the cash
flow system.
The results presented in Table 4 indicate that a change in institutional setting can significantly impact the incremental
value relevance of disaggregated earnings over aggregated earnings to explain future earnings. Further, the table indicates
that the disaggregated components of earnings have noteworthy incremental explanatory power over aggregated earnings
to explain forthcoming earnings, and a significant difference between explanatory power of accruals and cash to explain
future earnings was observed. Additionally, results indicate a notable difference in incremental explanatory power of dis-
aggregated earnings over aggregated earnings between intangible intensive and non-intangible intensive firms to explain
future earnings. Specifically, the incremental explanatory power of disaggregated earnings to explain future earnings is
higher in intangible intensive firms compared to non-intangible intensive firms. However, in non-intangible intensive firms,
the incremental explanatory power of the cash flow system is higher than the accrual system in all the periods. In intangible
intensive firms, results vary across the three periods. Hence, H1 (b) is supported, H2 (b) and H3 (b) are rejected, and H4 (b)
is supported.
6.2.2. Accruals and Cash Flows Equations

Table 5 presents the period-wise regression estimations for the predictive link equation of earning components, i.e.
accruals (2ib) and cash flows (2iib) for all, intangible, and non-intangible intensive firms. In P1, for all firms, in the accrual
system the coefficients of lagged accruals and lagged book value of equity are not significant. Whereas, the coefficients of
both lagged cash flows and lagged book value of equity are positively significant in the cash flows system. Further, similar
results were observed for non-intangible intensive firms. But in intangible intensive firms, coefficients of accruals and cash
flows are not significant and the coefficients of the book value of equity is positively significant in both systems. In non-
intangible intensive firms, the book value of equity is significant (not significant) to predict future cash flows (accruals).
Consistent with Collins et al. (1997), our results show that the book value of equity’s role is more significant in intangible
intensive firms than non-intangible intensive firms. Further, the explanatory power of autoregressive accruals and cash flow
Table 5
Period-wise regression statistics of accruals and cash flows predictive link.
Model 2ib: ACCit = ω20 + ω22 ACCit−1 + ω23 BVEit−1 + ε2it Model 2iib: CFOit = ω20 + ω22 CFOit−1 + ω23 BVEit−1 + ε2it
2 2
Periods N ω22 ACC ω23 BVE Adj R ω22 CFO ω23 BVE Adj R
Intangible intensive 2002-2006 179 −0.268 1.257*** 0.015 0.957* 1.109** 0.016
firms 2007-2011 179 −7.611*** 1.249*** 0.538 −5.576*** 2.936*** 0.503
2011-2015 179 −3.262*** 1.480*** 0.104 −2.791** 2.130*** 0.140
Pooled 179 −1.636*** 0.035*** 0.130 −0.367*** 0.203*** 0.135
Non-Intangible 2002-2006 362 0.218 −0.164 0.083 0.442*** 0.235*** 0.106
intensive firms 2007-2011 362 0.318*** −0.247*** 0.309 0.382** 0.281** 0.341
2011-2015 362 1.273*** −0.255*** 0.287 0.896*** 0.216*** 0.340
Pooled 362 0.862*** −0.010*** 0.286 0.444*** 0.013*** 0.421
Overall firms 2002-2006 541 0.271 −0.178 0.075 0.441*** 0.217*** 0.100
2007-2011 541 0.959*** −0.268*** 0.282 0.437*** 0.275*** 0.316
2011-2015 541 1.076*** −0.304*** 0.268 0.725*** 0.240*** 0.310
Pooled 541 0.695*** −0.012*** 0.215 0.371*** 0.015*** 0.379
Notes: MVE is the market value of equity, BEV is book value of equity, AE is abnormal earnings, ACC is total accruals, CFO is cash flows from operations,
and v is other information. Panels A and B estimations are based valuation link of LIM1, LIM2i, and LIM2ii. The separate industry and pooled regression are
estimated with year fixed effect. *** and ** indicates significance at 1% and 5%, level or better, respectively.
equations in intangible intensive firms are 0.015 and 0.016, respectively. For intangible intensive firms, the explanatory
power of autoregressive accruals and cash flow equations are 0.083 and 0.106, respectively.
The estimated results indicate that in P1, lagged accruals are not significant to explain future accruals in both intangible
and non-intangible intensive firms, whereas lagged cash flows have significant (insignificant) power to explain future cash
flows in non-intangible (intangible) intensive firms. The results for non-intangible (intangible) intensive firms are aligned
(not aligned) with the expectation of a significant role of cash flows to predict upcoming cash flows in P1, as P1 is the period
when AS3 became mandatory.
Further, in P2, for non-intangible intensive firms, the coefficients of lagged accruals are positively significant and the
coefficients of lagged book value of equity are negatively significant in the accrual system. Comparatively, in the cash flow
system, the coefficients of both lagged cash flows and lagged book value of equity are positive and significant. However,
regarding intangible intensive firms, the coefficients of lagged accruals and cash flows are negatively significant and the
coefficients of lagged book value of equity are positive and significant in both systems. The estimate results for non-intangible
(intangible) intensive firms are consistent (inconsistent) with previous research (Barth et al., 1999, 2005; Dawar, 2014). The
results support Bushman et al. (2016) that the basic properties of earning components are changing due to intangible
intensity. Similar results were also observed in P3.
Consistent with Barth et al. (1999), the explanatory power of the autoregressive accruals equations is less than the autore-
gressive cash flows equation in all the three periods and for both intangible and non-intangible intensive firms (except in P2
for intangible intensive firms). In the P2, India became TRIPS compliant, which results in more capitalization of R&D expen-
ditures and a high persistence of accruals due to the expected amortization of capitalized R&D expenditures. Furthermore,
in intangible intensive and non-intangible intensive firms, the explanatory power of autoregressive accruals and cash flows
increases in P2 and decreases in P3, but the marginal increment and decrement is comparatively larger in intangible intensive
firms compared to non-intangible intensive firms. The results presented in Table 5 indicate that the basic properties of the
earning components’ ability to predict future earning components are affected by the level of a firm’s intangible intensity.
Hence, H5 is supported.
7. Summary, Conclusion, and Contribution
7.1. Summary and conclusion
This study investigated the effects of segregating earnings into accruals and cash flows on equity values and future
value of earnings and earning components in India. Specifically, the incremental value relevance of disaggregated earnings
components over aggregated earnings was investigated. Moreover, results were compared with the findings in developed
capital markets (Barth et al., 1999, 2001). Further, the study explores the impact of the level of a firm’s intangible intensity
on the incremental value relevance of disaggregated over aggregated earnings. We adopted the LIM structure Barth et al.
(1999, 2005) specified based on the Ohlson (1995, 1999) model. An analysis of earning and earning component properties
assisted in the assessment of applicability and reliability of disaggregation of earnings to elucidate the theoretical market
value of future earnings and equity values.
The findings suggest that the disaggregated earnings consist of incremental explanatory power over aggregated earnings
to elucidate both the market value of equity and future earnings, irrespective of a firm’s level of intangible intensity. These
results indicate that investors consider disaggregated earnings information more than aggregated earnings data to make
a decision on equity values and future earnings. Further, the incremental explanatory power of disaggregated earnings
over aggregated earnings is higher in intangible intensive firms compared to non-intangible intensive firms to explain both
equity values and future earnings. These results indicate that investors consider disaggregated earnings information more for
intangible intensive firms than non-intangible intensive firms for equity valuation and prediction of future earnings. Thus,
inconsistent with prior results based on 30 BSE listed firms (Dawar, 2014), we conclude that investors are not fixated on
aggregated earnings to determine equity values. The results also indicate that the intangible intensity nature of a firm plays
a significant role to determine the level of consideration of disaggregated earnings for equity values and future earnings.
In addition, findings suggest that for equity valuation, the incremental explanatory power of accruals is higher than cash
flows in intangible intensive firms and vice versa for non-intangible intensive firms. For prediction of future earnings, the
results varied by period for intangible intensive firms. But in all periods for non-intangible intensive firms the incremental
explanatory power of cash flows is higher than that of accruals. Altogether, we found that in intangible intensive firms,
investors consider accruals over cash flows for equity valuation and prediction of future earnings, whereas in non-intangible
intensive firms, investors consider cash flows over accruals for both equity valuation and prediction of future earnings. Thus,
we concluded that the intangible intensity nature of a firm has a notable role in determining the level of consideration of
accruals or cash flows for equity values and future earnings.
Further, the estimated results of predictive equations of disaggregated earning components are inconsistent (con-
sistent) with prior literature in intangible (non-intangible) intensive firms (Barth et al., 1999). Specifically, a negatively
(positively) significant relation was observed between current and lagged disaggregated earning components in intangible
(non-intangible) intensive firms. The results confirm the previous findings and support the notion that the basic properties
of earning and earning components are changing due to the relative intangible intensity of a firm (Bushman et al., 2016).
Moreover, in all three periods, the predictive power of cash flows to predict future cash flows are greater than the predictive
power of accruals to predict future accruals, irrespective of a firm’s intangible intensity (except P2 in intangible intensive
firms). These results match previous studies (Barth et al., 1999). However, the predictive powers of earning components
to predict future values of earning components is higher in non-intangible intensive firms than intangible intensive firms.
Thus, we conclude that the level of a firm’s intangible intensity plays a significant role to determine the level of persistence
of earning components.
Our evidence indicates that the investor’s response towards earning and earnings components is significantly different
for intangible intensive compared to non-intangible intensive firms in India. Consistent with prior research, disaggregated
earning components create more value relevant information in intangible intensive firms (Thi & Schultze, 2011). Investors
consider the nature of intangible intensity to determine how extensively to use accruals and cash flows information over
aggregated earnings information for their investment decisions. Moreover, the individual properties of accruals and cash
flows are inconsistent (consistent) with prior studies based on developed capital markets in intangible (non-intangible)
intensive firms (Barth et al., 1999).
7.2. Contributions of the study
This study carries both theoretical and practical contribution. Theoretically, this study will enrich the literature related
to the value relevance of accounting information. Previous studies investigated the incremental value relevance of disag-
gregated earnings over aggregated earnings (Barth et al., 1999, 2005; Dawar, 2014), but no study had examined how the
nature of a firm’s intangible intensity impacts the incremental value relevance of disaggregated earnings. This study filled
that gap in the literature in the context of India, an emerging market. The Indian market is an emerging market and subject
to several dynamic institutional settings. We captured the impact of some changes in its institutional environment, such as
the adoption of AS3 (accounting standard for cash flow statement), TRIPS compliance, and adoption of IndAS (accounting
standards in convergence with IFRS).
The findings of this study should help standard setters better formulate IndAS during convergence with IFRS. More
specifically, this study provides insight on the significance of a firm’s intangible intensity while determining accounting
standards.
Moreover, the study’s findings should help managers understand the importance of disaggregated earnings and the
effects of intangible intensity on a firm. So, as suggested by Arthur, Tang, and Lin (2015), in addition of aggregated earnings,
managers should also emphasize the reporting of disaggregated earnings to convey their private information to markets in
order to reduce information asymmetry between managers and investors. Managers of intangible intensive firms should
emphasize the reporting of accrual components of earnings more than cash flows components of earnings, whereas, for
non-intangible intensive firms, managers should emphasize the reporting of cash flows components of earnings more than
accruals components of earnings. So, to facilitate better prediction of future earnings to investors when reporting accounting
information, managers should emphasize the cash flow components more than the accruals components of earnings.
The limitations of the study provide a feasible scope for future research. First, the study is based on the Indian market;
therefore, similar studies should be replicated in other emerging economies to generalize the findings of this study. Second,
the impact of firm-specific factors, like size, leverage, and growth, has not been captured; therefore, future studies can be
conducted with the control of firm-specific factors.
Acknowledgement
The Infrastructural support provided by FORE School of Management, New Delhi in completing this paper is gratefully
acknowledged.
References
Amir, E., & Lev, B. (1996). Value-relevance of nonfinancial information: The wireless communications industry. Journal of Accounting and Economics,
22(1-3), 3–30. http://dx.doi.org/10.1016/S0165-4101(96)00430-2
American Institute of Certified Public Accountants. (1994). Improving Business Reporting–a Customer Focus: Meeting the Information Needs of Investors and
Creditors: Comprehensive Report. American Institute of Certified Public Accountants.
https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=1105&context=aicpa comm
Akbar, S., Shah, S. Z. A., & Stark, A. W. (2011). The value relevance of cash flows, current accruals, and non-current accruals in the UK. International Review
of Financial Analysis, 20(5), 311–319. http://dx.doi.org/10.1016/j.irfa.2011.06.005
Arthur, N., Tang, Q., & Lin, Z. S. (2015). Corporate accruals quality during the 2008–2010 global financial crisis. Journal of International Accounting, Auditing
and Taxation, 25, 1–15. http://dx.doi.org/10.1016/j.intaccaudtax.2015.10.004
Asthana, S. C., & Zhang, Y. (2006). Effect of R&D investments on persistence of abnormal earnings. Review of Accounting and Finance, 5(2), 124–139.
http://dx.doi.org/10.1108/14757700610668967
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of
Financial Economics, 121(1), 28–45. http://dx.doi.org/10.1016/j.jfineco.2016.03.002
Ball, R., & Shivakumar, L. (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44(2), 207–242.
http://dx.doi.org/10.1111/j.1475-679X.2006.00198.x
Barth, M. E., Beaver, W. H., & Landsman, W. R. (1998). Relative valuation roles of equity book value and net income as a function of financial health. Journal
of Accounting and Economics, 25(1), 1–34. http://dx.doi.org/10.1016/S0165-4101(98)00017-2
Barth, M. E., Beaver, W. H., Hand, J. R., & Landsman, W. R. (1999). Accruals, cash flows, and equity values. Review of Accounting Studies, 4(3-4), 205–229.
http://dx.doi.org/10.1023/A:1009630100586
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(1), 27–58.
http://dx.doi.org/10.2308/accr.2001.76.1.27
Barth, M. E., Beaver, W. H., Hand, J. R., & Landsman, W. R. (2005). Accruals, accounting-based valuation models, and the prediction of equity values. Journal
of Accounting, Auditing & Finance, 20(4), 311–345. http://dx.doi.org/10.1177/0148558X0502000401
Bernard, V. L., & Stober, T. L. (1989). The nature and amount of information in cash flows and accruals. The Accounting Review, 64, 624–652.
https://www.jstor.org/stable/247852
Bernard, V. L. (1995). The Feltham-Ohlson framework: Implications for empiricists. Contemporary Accounting Research, 11(2), 733–747.
http://dx.doi.org/10.1111/j.1911-3846.1995.tb00463.x
Black, E. L. (1998). Which is More Value-Relevant: Earnings or Cash Flows? Available at SSRNhttps://ssrn.com/abstract=118089or.
http://dx.doi.org/10.2139/ssrn.118089
Brand Finance. (2017). Global Intangible Finance Tracker. An annual review of the world’s intangible value June 2017.
https://brandfinance.com/images/upload/gift report 2017 bf version high res version.pdf
Bushman, R. M., Lerman, A., & Zhang, X. (2016). The changing landscape of accrual accounting. Journal of Accounting Research, 54(1), 41–78.
http://dx.doi.org/10.1111/1475-679X.12100
Chan, L., Lakonishok, J., & Sougiannis, T. (2001). The stock market valuation of research and development expenditures. Journal of Finance, 56(6),
2431–2456. http://dx.doi.org/10.1111/0022-1082.00411
Chen, C. J., Chen, S., & Su, X. (2001). Is accounting information value-relevant in the emerging Chinese stock market? Journal of International Accounting,
Auditing and Taxation, 10(1), 1–22. http://dx.doi.org/10.1016/S1061-9518(01)00033-7
Collins, D. W., Maydew, E. L., & Weiss, I. S. (1997). Changes in the value-relevance of earnings and book values over the past forty years. Journal of
Accounting and Economics, 24(1), 39–67. http://dx.doi.org/10.1016/S0165-4101(97)00015-3
Daraghma, Z. M. (2010). The Relative and Incremental Information Content of Earnings and Operating Cash Flows: Empirical Evidence from Middle East,
the Case of Palestine. European Journal of Economics, Finance and Administrative Sciences, 22(5), 123–135.
Dawar, V. (2014). Earnings persistence and stock prices: empirical evidence from an emerging market. Journal of Financial Reporting and Accounting, 12(2),
117–134. http://dx.doi.org/10.1108/JFRA-06-2013-0044
Dechow, P. M., Hutton, A. P., & Sloan, R. G. (1999). An empirical assessment of the residual income valuation model. Journal of Accounting and Economics,
26(1), 1–34. http://dx.doi.org/10.1016/S0165-4101(98)00049-4
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and
Economics, 18(1), 3–42. http://dx.doi.org/10.1016/0165-4101(94)90016-7
Dichev, I. D., & Tang, V. W. (2008). Matching and the changing properties of accounting earnings over the last 40 years. The Accounting Review, 83(6),
1425–1460. http://dx.doi.org/10.2308/accr.2008.83.6.1425
FASB. (2010). Concepts Statement No. 8: Conceptual Framework for Financial Reporting: Chapter 1, The Objective of General Purpose Financial Reporting, and
Chapter 3, Qualitative 36 Characteristics of Useful Financial Information. Norwalk: Financial Accounting Standards Board.
https://www.fasb.org/resources/ccurl/515/412/Concepts%20Statement%20No%208.pdf
Farshadfar, S., & Monem, R. (2013). The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: A
re-examination and extension. Accounting & Finance, 53(4), 1061–1082.
Frankel, R., & Lee, C. M. (1998). Accounting valuation, market expectation, and cross-sectional stock returns. Journal of Accounting and Economics, 25(3),
283–319. http://dx.doi.org/10.1111/j.1467-629X.2012.00486.x
Gupta, O. P. (1990). Stock market efficiency and random character of share price behaviour in India. Asia Pacific Journal of Management, 7(2), 165–174.
http://dx.doi.org/10.1007/BF01951488
Habib, A. (2008). The role of accruals and cash flows in explaining security returns: Evidence from New Zealand. Journal of International Accounting,
Auditing and Taxation, 17(1), 51–66. http://dx.doi.org/10.1016/j.intaccaudtax.2008.01.003
Hao, Q., & Li, K. (2016). The Bright side of discretionary accruals: Evidence from finance and innovation. European Financial Management, 22(4), 540–575.
http://dx.doi.org/10.1111/eufm.12068
Haskel, J., & Westlake, S. (2018). Capitalism without capital: The rise of the intangible economy. Princeton, NJ: Princeton University Press.
Haw, I. M., Qi, D., & Wu, W. (2001). The nature of information in accruals and cash flows in an emerging capital market: The case of China. The
International Journal of Accounting, 36(4), 391–406. http://dx.doi.org/10.1016/S0020-7063(01)00107-8
Holthausen, R. W., & Watts, R. L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and
Economics, 31(1), 3–75. http://dx.doi.org/10.1016/S0165-4101(01)00029-5
India Brand Equity Foundation. (2018). Industry Analysis Report. https://www.ibef.org/archives/industry
Lee, C., Myers, J., & Swaminathan, B. (1999). What is the intrinsic value of the Dow? The Journal of Finance, 54(5), 1693–1741.
http://dx.doi.org/10.1111/0022-1082.00164
Lev, B., & Nissim, D. (2006). The persistence of the accruals anomaly. Contemporary Accounting Research, 23(1), 193–226.
http://dx.doi.org/10.1506/C6WA-Y05N-0038-CXTB
Lev, B., & Zarowin, P. (1999). The boundaries of financial reporting and how to extend them. Journal of Accounting Research, 37(2), 353–385.
Lev, B. (2004). Sharpening the intangibles edge. Harvard Business Review, 82(6), 109–116.
Lev, B. (1989). On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research. Journal of Accounting
Research, 27(Suppl), 153–192. https://www.jstor.org/stable/2491070
Lundholm, R. J. (1995). A tutorial on the Ohlson and Feltham/Ohlson models: Answers to some frequently asked questions. Contemporary Accounting
Research, 11(2), 749–761. http://dx.doi.org/10.1111/j.1911-3846.1995.tb00464.x
Ministry of Finance. (2015). Economic survey 2015–2016. New Delhi: Government of India 2016 Retrieved 10 August 2016, from.
https://www.indiabudget.gov.in/budget2016-2017/survey.asp
Myers, J. N. (1999). Implementing residual income valuation with linear information dynamics. The Accounting Review, 74(1), 1–28.
http://dx.doi.org/10.2308/accr.1999.74.1.1
Ohlson, J. A. (1995). Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11(2), 661–687.
http://dx.doi.org/10.1111/j.1911-3846.1995.tb00461.x
Ohlson, J. A. (1999). On transitory earnings. Review of Accounting Studies, 4(3-4), 145–162. http://dx.doi.org/10.1023/A:1009653114699
Ota, K. (2002). A test of the Ohlson (1995) model: Empirical evidence from Japan. The International Journal of Accounting, 37(2), 157–182.
PricewaterhouseCooper. (2017). PwC Ind AS impact analysis: Corporate India’s transition to Ind AS.
https://www.pwc.in/assets/pdfs/publications/2017/pwc-ind-as-impact-analysis-corporate-indias-transition-to-ind-as.pdf
Qu, X., & Zhang, G. (2015). Value-relevance of earnings and book value over the institutional transition in China: The suitability of fair value accounting in
this emerging market. The International Journal of Accounting, 50(2), 195–223. http://dx.doi.org/10.1016/S0020-7063(02)00150-4
Rayburn, J. (1986). The association of operating cash flow and accruals with security returns. Journal of Accounting Research, 24(Suppl), 112–133.
Sharma, J. L., & Kennedy, R. E. (1977). A comparative analysis of stock price behavior on the Bombay, London, and New York Stock Exchanges. Journal of
Financial and Quantitative Analysis, 12(3), 391–413. http://dx.doi.org/10.2307/2330542
Sharma, D. S., & Iselin, E. R. (2003). The relative relevance of cash flow and accrual information for solvency assessments: A multi-method approach.
Journal of Business Finance & Accounting, 30(7-8), 1115–1140. http://dx.doi.org/10.1111/1468-5957.05421
Shust, E. (2015). Does research and development activity increase accrual-based earnings management? Journal of Accounting. Auditing & Finance, 30(3),
373–401. http://dx.doi.org/10.1177/0148558X14560901
Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315.
Srivastava, A. (2014). Why have measures of earnings quality changed over time? Journal of Accounting and Economics, 57(2), 196–217.
http://dx.doi.org/10.1016/j.jacceco.2014.04.001
Starica, C., & Kang, J. (2017). Why have measures of earnings quality changed over time? A competing narrative Available at SSRN.
http://dx.doi.org/10.2139/ssrn.3038909
Thi, T. D., & Schultze, W. (2011). Capitalizing research & development and ‘other information’:The incremental information content of accruals versus
cash flows. Journal of Management Control, 22(3), 241–278. http://dx.doi.org/10.1007/s00187-011-0137-4
Wang, P. (2013). The role of disaggregation of earnings in stock valuation and earnings forecasting. Accounting and Business Research, 43(5), 530–557.
http://dx.doi.org/10.1080/00014788.2013.804794
Wedig, G. J. (1990). How risky is R and D? A financial approach. The Review of Economics and Statistics, 72(2), 296–303.
Wilson, G. P. (1986). The relative information content of accruals and cash flows: Combined evidence at the earnings announcement and annual report
release date. Journal of Accounting Research, 24(Suppl), 165–200. https://www.jstor.org/stable/2490736
Wilson, G. P. (1987). 1986 competitive manuscript award: The incremental information content of the accrual and funds components of earnings after
controlling for earnings. The Accounting Review, 62(2), 293–322. https://www.jstor.org/stable/247928
Yao, D., Percy, M., Stewart, J., & Hu, F. (2017). Fair value accounting and earnings persistence: Evidence from international banks. Journal of International
Accounting Research, 17(1), 47–68. http://dx.doi.org/10.2308/jiar-51983
Zhao, R. (2002). Relative value relevance of R&D reporting: An international comparison. Journal of International Financial Management & Accounting,
13(2), 153–174. http://dx.doi.org/10.1111/1467-646X.00082
Dr Pooja Kumari is an Assistant Professor in Accounting in the Fore School of Management, New Delhi, India. Her research interests are in the areas of
value relevance of accounting information and earning management. Her research has been published in the Global Business Review, International Journal
of Accounting, Auditing and Performance Evaluation, International Journal of Nonprofit and Voluntary Sector Marketing, South Asian Journal of Management,
Journal of Financial Reporting and Accounting, Asian Journal of Finance and Accounting, and Journal of Internet Banking and Commerce, among others.
Dr Chandra Sekhar Mishra is an Associate Professor in Accounting at the Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur
India. His research interests are in the areas of accounting, merger and acquisition. His research has been published in the Journal of International
Accounting, Auditing and Taxation, Global Business Review, International Journal of Accounting, Auditing and Performance Evaluation, Journal of Financial
Reporting and Accounting, and Asian Journal of Finance and Accounting, among others.

Kumari2020 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Kumari2020 PDF

Uploaded by

Copyright:

Available Formats

Journal of International Accounting, Auditing and Taxation 39 (2020) 100321

Contents lists available at ScienceDirect

Journal of International Accounting,

Value relevance of aggregated and disaggregated earnings in

2. Market and Intangible Intensity in India

3. Related Literature and Hypotheses

BVE it = ω20 + ω22 BVE it−1 + ε2it (1b)

5. Data and Descriptive Statistics

5.1. Data and Sample selection

5.2. Descriptive statistics

Variable Name Mean Median Standard Deviations

BVE (book value of equity) 13,557.67 1,575.20 75,341.31

Mean Median Standard Deviations

Intangible Non- Intangible Intangible Non- Intangible Intangible Non- Intangible

MVE BVE AE ACC CFO v

MVE (market value of equity) 1

MVE (market value of equity) 1

Non- Intangible intensive ﬁrms MVE BVE AE ACC CFO v

MVE (market value of equity) 1

6. Results and Findings

6.1. Valuation Link Equations

Intangible intensive 2002-2006 179 8.992*** 1.892*** 0.039*** 0.367

Accruals System Cash Flows System

6.2. Predictive Link Equations

6.2.1. Abnormal earnings equations

Intangible intensive 2002-2006 179 9.832*** −0.383*** 0.014** 0.217

Accruals System Cash Flows System

6.2.2. Accruals and Cash Flows Equations

Accruals System Cash Flows System

7. Summary, Conclusion, and Contribution

7.1. Summary and conclusion

7.2. Contributions of the study

You might also like

Intangible intensive 2002-2006 179 8.992* 1.892* 0.039*** 0.367

Intangible intensive 2002-2006 179 9.832* −0.383* 0.014** 0.217