Asian Review of Accounting

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

case of India
Padmini Srinivasan M.S. Narasimhan
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ARA
20,1
The value relevance of
consolidated financial statements
in an emerging market
58 The case of India
Padmini Srinivasan and M.S. Narasimhan
Finance & Control Area, Indian Institute of Management Bangalore,
Bangalore, India

Abstract
Purpose – India is one of the few countries where companies are required to give both consolidated
financial statements (CFS) as well as parent-only financial statements. While parent-only statements
have been in existence for a long time, CFS was introduced recently. The purpose of this paper is to
examine the value relevance of CFS in India.
Asian Review of Accounting 2012.20:58-73.

Design/methodology/approach – The value relevance of CFS is examined through an empirical

study. The study examines the relationship between market values and consolidated earnings and
parent-only earnings is analysed. The study uses four years data of 59 companies whose subsidiary
earnings are more than 20 per cent of consolidated revenue.
Findings – Initial results show that annual CFS are not value relevant, whereas annual parent-only
financial statements are value relevant. However, wherever quarterly financial statements are
available, CFC are found to be value relevant and parent-only financial statements are not value
relevant.
Practical implications – While CFS and parent-only financial statement on an annual basis are
mandatory, companies have the option to publish parent-only financial statement on a quarterly basis
while not reporting quarterly consolidated financial statements. This inconsistency in the regulation
causes confusion to investors who receive parent-only quarterly financial statements for three quarters
and suddenly consolidated financial statements at the end of the year. The paper shows how market
reacts to such reporting practices.
Originality/value – In addition to examining the value relevance of CFS, the paper also examines the
impact of incomplete regulations of financial reporting on asset pricing.
Keywords India, Financial reporting, Accounting information, Consolidated earnings,
Parent-only earnings, Quarterly earnings, Cash flow, Value relevance
Paper type Research paper

Asian Review of Accounting
Vol. 20 No. 1, 2012
pp. 58-73
r Emerald Group Publishing Limited
1321-7348
DOI 10.1108/13217341211224727
1. Introduction
This paper examines the value relevance of consolidated versus parent-only financial
information. Consolidated financial statements (CFS) are the financial statements of
parent company and one or more legally distinct subsidiaries presented as group like
a single economic entity. Under the entity concept approach, the interrelationships and
dependencies of the parent company and its subsidiaries are represented in the
financial statements. CFS thus reflects the total resources held by the group. CFS along
with parent-only statements becomes a basis for estimating and assessing the parent
company’s earnings as well as the return on its investments. A fundamental
assumption made while analyzing the consolidated statements is that the assets and
liabilities of the consolidated entity are controlled by and are available to the parent
company and hence, to its shareholders. This assumption may or may not reflect the
parent’s ownership position. Arguments against CFS are from two perspectives.
 In cases of partly owned subsidiaries, mere preparation of consolidated statements Consolidated
may not help in interpreting the performance of the parent company and may lead to financial
misinterpretation of its income (Walker, 1976). Consolidation may also aid the
management in smoothening the reported profits of the holding companies’ as a means statements
of fostering financial stability (Whittered, 1986) through propping (Friedman et al.,
2003). Thus, depending upon the financials of the subsidiary, consolidation may
result in financial statements that look better or worse than the actual results 59
(White et al., 2001).
CFS are in existence for a long time in the USA and UK and no parent-only
statements are available to the investors. In rest of the world CFS is a recent
requirement. In India, Japan and a few European countries both consolidated and
parent-only statements are reported. The existence of both consolidated and parent-
only statements gives a unique opportunity for examining the value relevance of these
statements. This paper investigates whether parent company earnings or the
consolidated earnings, provide more value relevant information for pricing parent
company shares. In examining the value relevance of earnings we consider accrual
earnings as well as cash flow from operations. Further, we extend our study to examine
the value relevance of consolidated earnings provided by firms on a quarterly basis. It
Asian Review of Accounting 2012.20:58-73.

is interesting to examine how markets react to information when two regulating

agencies in a country prescribe different reporting requirements relating to
consolidated earnings. One regulating agency requires all companies to provide both
parent and consolidated financial information on an annual basis. The other regulator
does not mandate consolidated information when it comes to quarterly reporting of
earnings.
The results of the study indicate that parent-only accrual earnings is value relevant
and provide significant explanation to market value. However, the results based on
firms, which provide quarterly consolidated earnings, confirm their value relevance
whereas parent-only earning is not value relevant. Our study is important for several
reasons. First, Indian economy witnessed a substantial flow of investment through
foreign direct investment and foreign institutional investing in the Indian stock
markets. Foreign direct investment was around US $315 million in 1992-1993 and it
increased to US $154 billion in 2007-2008. Similarly, foreign institutional investments
(FII) grew from a mere US $244 million in 1992-1993 to US $203.27 billion during
2007-2008[1]. The number of FII’s reached around 1,700 during the same period and the
value of their net portfolio was around US $273.09 billion. Indian companies are also
active in raising equity capital in the international markets through American
Depository Receipts (ADR), Global Depository Receipts (GDR) and private equity.
Value relevance of accounting information is important to the foreign investors as they
invest in emerging markets. Indian companies have also made large global acquisitions
in the last few years with outbound investments of more than US $38 billion during
2007-2010[2]. Indian investors would be interested in the combined earnings to assess
the impact of such acquisitions. Second, in emerging markets and transition economies,
there are very few studies that examine the value relevance of accounting information
(Abdel-Khalik et al., 1999; Chen et al., 2001; Hellström, 2006; Pirie and Smith, 2008; Filip
and Raffournier, 2010). Economic development, cultural and historical influences (path
dependency), legal and political environments and institutional arrangements affect
the reporting and hence studies cannot be generalized and country-specific studies are
needed (Ali and Hwang, 2000). There is no notable study on the value relevance of
accounting numbers in emerging market such as India. This study examines the
 ARA relative usefulness of the parent-only and CFS and contributes to the literature on the
20,1 value relevance of accounting information in India. Third, in all value relevance
studies on parent and consolidated earning, the accrual earning alone is considered.
Accounting Standard Board (ASB) while requiring companies to provide cash flow
statement states cash flow statement is useful in checking the accuracy of past
assessments of future cash flows and in examining the relationship between
60 profitability and net cash flow and the impact of changing prices[3]. Many studies
which compared the value relevance of accrual earnings and cash flows also find that
cash flows are value relevant. Charitou et al. (2000) find earnings and cash flows to be
jointly associated with the stock returns in Japan. We examine the value relevance cash
flows from operations along with accrual earnings. Lastly, the findings of this study
are also important to the regulators and the accounting standards setters as they
deliberate on setting common standards (adopting International Financial Reporting
Standards (IFRS)) to ensure uniformity and enhance the reliability of financial
statement information.
In summary, Indian stock market is of interest in its own way particularly with the
increased investments by foreign institutions and Indian outbound investments. In
spite of this, empirical research has not kept pace with the rest of the world in
Asian Review of Accounting 2012.20:58-73.

evaluating the value relevance accounting information on stock prices. Institutional

background is very different in India compared to that of mature markets and may be a
factor affecting the study. This paper contributes to the growing literature on value
relevance from an emerging market such as India. The rest of the paper is structured as
follows. In Section 2, we trace the financial reporting environment in India. Section 3
presents the literature relating to value relevance of CFS. The methodology and data
are described in Section 4. Section 5 reports empirical results and Section 6 summarizes
the findings and concludes the paper.

2. Financial reporting environment in India

The presence of multinational and FII’s in India increased significantly after the
initiation of market reforms in the early 1990s. Growing foreign investments as well
as the free mobility of these investments led to economic and political pressure to
reform the financial and other systems to be acceptable to the international investors.
The need for better transparency and good governance is imperative in order to attract
both domestic as well as foreign capital.
Financial reporting in India is governed predominantly by the Companies Act of
1956, the Indian Accounting Standards (IAS), and to some extent by the stock
exchange listing agreements. Most of the laws in India are historically modeled in-line
with the UK laws including The Companies Act, 1956 that governs registered
companies. The Companies Act, 1956 specifies the format and content of financial
statement reporting. All companies are required to file their annual reports with the
Registrar of Companies which is part of the Ministry of Company Affairs (MCA). The
accounting standards are formulated by the ASB constituted by the Institute of
Chartered Accountants of India (ICAI). The ICAI is a statutory body that regulates the
working of the accounting and auditing profession. By 2010, 32 accounting standards
were issued by the ASB. These accounting standards were notified by the MCA under
the Companies Act, making them mandatory. There are more than 150,000 professional
accountants registered under ICAI in the country. The Securities and Exchange Board
of India (SEBI), a regulatory body was setup in 1992 to protect the interest of investors,
promote the development and improve the functioning of the financial markets. SEBI
 mandates additional disclosures for listed companies through the listing agreement Consolidated
between the company and the stock exchanges. Reforms in corporate governance, financial
reporting and markets in India are implemented based on recommendations of several
committees[4]. Some of the new regulations include the harmonization and ultimately statements
adopting of the International Financial Accounting Standards by 2011 and substantial
revision and enhancing of Clause 49 of the listing agreement between the stock
exchanges and the companies. A major reporting initiative was the presentation of 61
CFS and the statement of consolidated cash flow (SCF) from the accounting year 2001
onwards. CFS is useful especially when firms have several subsidiaries.
Until 2001, Indian companies prepared parent-only financial statements and
attached, in their annual reports to shareholders, standalone accounts of every
subsidiary along with auditor’s report, besides disclosing summarized ownership
information related to all subsidiaries. That is, if a company had ten subsidiaries, then
the financial statements (as part of the annual report) of all the ten subsidiaries were
provided along with parent-only report. The results of the subsidiaries are specifically
required to be highlighted when there are losses. Such a presentation reveals the results
of the parent as well as that of the subsidiaries. The short-term creditors of both the
parent and subsidiary know their claims and the assets available for distribution. The
Asian Review of Accounting 2012.20:58-73.

Corporate Law Committee that was responsible for formulating The Companies Act,
1956 specifically rejected the consolidation and argued that the financial statements of
the subsidiaries provide more information to the users of financial statements as they
can get information of assets, liabilities and incomes of individual subsidiaries. The
committee concluded that “no additional information was derived from consolidation”
(Ramaiya, 1998).
CFS was mandated in 2001, as a move toward achieving convergence between IAS
and IFRS. Currently Indian companies prepare financial statements of parent-only and
subsidiary companies as per the provisions of The Companies Act, 1956 and CFS as
specified in AS 21. Although, financial statements of parent-only and consolidated
statements are to be provided to all shareholders, Indian companies should provide
the financial statements of subsidiary companies to interested shareholders. AS 21
requires companies to prepare consolidated balance sheet, profit and loss statements as
well as consolidated cash flow statement. The Indian AS 21 is substantially in
conformity with IAS-27.
Companies listed in stock exchanges are also required to publish quarterly results
within one month from the end of each quarter. Companies have an option to publish
consolidated results. However, the choice once exercised in the first quarter cannot be
changed during the year. This option to provide quarterly consolidated statements
causes significant variation in disclosure practices of Indian companies. The income
tax rules does not consider the “entity concept” and the parent and subsidiary are
treated as separate entities and no set off losses and other benefits can be derived by
consolidation.

3. Value relevance of consolidated earnings and cash flows

Value relevance of financial statements is the subject matter of research for many
years. Several studies in the USA empirically examined the value relevance of financial
statements and found a decline in value relevance over the years. However, outside the
USA several studies report significant value relevance of the accounting numbers.
Using data from six Asian countries, Graham and King (2000) find that prices at the
year-end, in general, provide the highest correlation between market and accounting
 ARA numbers. Chen et al. (2001) find accounting information is value relevant in China
20,1 despite the market being relatively young and with inadequate reporting at that time.
Earlier, Abdel-Khalik et al. (1999) using the event study approach finds that accounting
earnings and prices of Class-A shares were not correlated but were correlated in
Class-B shares in the Chinese stock markets. A recent study by Brimble and Hodgson
(2007) examines the value relevance of accounting statements in the Australian
62 context. After controlling for market inefficiencies and non-linearity, they find that the
value relevance of the conventional core accounting earnings did not decline in the last
28 years.
The relative importance of consolidated and parent-only earnings and the way
consolidated statements are prepared was examined in detail by Walker (1976). The
existence of 100 percent subsidiaries, the group concept and the separation of
ownership from management had created the need for the consolidated statement.
When there are no wholly owned subsidiaries, there could be inconsistencies in the
preparation of the CFS. In many countries in Europe and Asia including India,
companies are required to prepare the parent-only statements for a long time until
mandated to prepare the CFS. In addition to parent-only financial statements,
companies in these countries were also required to provide financial statements of
Asian Review of Accounting 2012.20:58-73.

subsidiary companies and/or summary of financial statements of subsidiary

operations. In Japan for example, CFS did not gain importance as in the USA and
the UK. CFS was mandated in Japan towards the end of the twentieth century after
the entry of foreign companies into the Japanese Stock market (McKinnon, 1984). In the
EU, CFS was mandated for most countries only after the enactment of the Seventh
Company Law directive in 1983[5].
The information content of CFS and parent-only financial statements were
researched in a few countries (see Harris et al., 1997; Niskanen et al., 1998; Ishikawa,
2000; Abad et al., 2000; Herrmann et al., 2001; Okuda and Shiiba, 2006). Niskanen et al.
(1998) using data of 35 Finnish companies conclude that consolidated financial
earnings are a significant incremental explanatory variable for stock returns. Further,
CFS improved the information content as compared to the parent-only earnings. Abad
et al. (2000) investigated the value relevance of the parent and consolidated accounts
of Spanish companies listed in the Madrid Stock Exchange between 1991 and 1997.
Their result suggests that from a valuation perspective, CFS provide incremental value
relevant information over parent-only accounts. Harris et al. (1997) provide weak
evidence of value relevance of consolidated data over unconsolidated data using data
from German companies.
The value relevance of CFS versus the parent-only data was mixed in Japan. It is
widely argued that control issues, legal ownership, interlocking of directors and
mutual shareholding may not be reflected in the consolidated statements (Herrmann
et al., 2001). Darrough and Harris (1991) find that consolidated statements provide very
little incremental information content in Japan. Conroy et al. (2000) in a different
context also observed that analysts in Japan used parent-only financial statements
historically although this is changing. Herrmann et al. (2001) using data from the
Japanese stock market provided evidence that the stock markets adjusts to persistent
parent-only earnings and underestimates the subsidiary earnings. Recent study by
Okuda and Shiiba (2006) find that subsidiary return on equity affects stock returns
more than the parent-only returns.
Although accrual earnings are important, there is a shift toward the use of cash
flow statements. Cash flow statements provide a better picture of the company’s
 liquidity and risk bearing capacity. Regulators have also supported the usefulness of Consolidated
cash flows along with earnings in evaluating the share prices. Studies examining the financial
value relevance of cash flow report mixed results (see Bowen et al., 1986; Wilson, 1987;
Bernard and Stober, 1989; Livnat and Zarowin, 1990; Charitou and Ketz, 1991; Ali and statements
Pope, 1995; Cheng et al., 1996; Pfeiffer et al., 1998; Charitou et al., 2000). Jones and
Widajaja (1998) survey 159 financial statement users in Australia and found that cash
flow statement prepared using the direct method is relevant to the users. Board et al. 63
(1993) compare the stock price reaction to accrual earnings and cash flow disclosures
and find that earnings had better explanatory power than the cash flow. Even though
the findings are inconclusive, refined cash flow measures seem to provide a better
signal than earnings (Charitou, 1997). Hassan et al. (2001) surveyed the relative
usefulness of cash flow statements to the mutual fund analyst in Malaysia and India
and obtained contrary results.

4. Methodology and data

We examine the relationship between the stock price and accounting earnings and
cash flow from operations. Prior empirical models used the impact of accounting
information on stock prices or stock returns to measure the value relevance.
Asian Review of Accounting 2012.20:58-73.

Comparing price model, return model and differenced-price model, Kothari and
Zimmerman (1995) argue that the estimated slope coefficient from the price model is
unbiased compared to the returns and other models. Studies based on price model
include Abad et al. (2000) and Hellström (2006). In this paper we use the price models
as followed by Kothari and Zimmerman (1995). If the market utilizes such additional
disclosures in valuation, we expect a positive relationship between price and
consolidated earnings and cash flow from operations.
Our sample is drawn from companies, which are listed in the Bombay Stock
Exchange (BSE). BSE is the oldest (established in 1875) and largest exchange in India
with a market capitalization of $1,400 billion. Earnings and stock price data for the
study are sourced from the Center for Monitoring Indian Economy (CMIE) database.
Table I shows the frequency distribution of number of subsidiaries of listed
companies in India. A large number of Indian companies have neither a subsidiary
nor any significant subsidiary operations. Of the 4,954 listed companies, 3,769
companies (76 percent) have no subsidiary. Another 14 percent of the listed companies
have one subsidiary and in many cases, the companies are defunct or have negligible
operations. The average subsidiary revenue of a firm with one subsidiary is less than 2
percent of its consolidated revenue. The sample selection is critical in this context.
If our sample includes all listed companies including companies with no subsidiary
earnings or negligible earnings, it will influence the results[6]. We thus restrict our
sample to firms whose revenues from subsidiaries are a minimum 20 percent of

Number of subsidiaries Frequency Number of subsidiaries Frequency

0 3,769 6 20
1 690 7 18
2 210 8 7 Table I.
3 110 9 14 Frequency distribution of
4 64 10 and above 23 subsidiaries of listed
5 29 Total 4,954 companies
 ARA consolidated earnings. There are 59 companies whose subsidiary revenue is more
20,1 than 20 percent of the consolidated revenue for the period between 2004-2005[7] and
2007-2008[8]. The market capitalization of the sample as on March 2008 is Rs 6,491.52
billion ($144 billion), which represents 29.78 percent of the total market capitalization
of companies which have at least one subsidiary.
Table II provides the major financial variables of companies with at least one
64 subsidiary company. All firms are sorted in descending order on the basis of
consolidated earnings. Quartile 1 represents large firms whereas Quartile 4 shows
the statistics related to small firms. The mean parent-only revenue of all firms with a
minimum of one subsidiary is Rs 19,088.10 million against the consolidated revenue of
Rs 24,301.95 million. The parent-only earnings, assets and cash flows are about
80 percent of the consolidated values when we consider all firms having at least one
subsidiary. It means that subsidiary operation of all firms with a minimum of one
subsidiary is not significant. On the other hand, the contribution of subsidiary firms in
consolidated revenue, earnings, assets and cash flows of the sample firms is
significant. The mean consolidated revenue of the sample is Rs 47,633.2 million as
against the parent-only revenue of Rs 2,189.52 million i.e. 46 percent of the consolidated
revenue. It means nearly 54 percent of the revenue is through subsidiary operations.
Asian Review of Accounting 2012.20:58-73.

The subsidiary firms of the sample firms also contribute 39, 35 and 47 percent of the
consolidated earnings, assets and cash flow from operations.

(Rupees in billion)
Revenue Earnings Assets Cash flow

Quartile 1
Parent-only 17,537.62 1,708.31 41,050.95 1,998.43
Consolidated 22,369.68 2,014.49 49,666.49 2,597.47
Percent 78 85 83 77
Quartile 2
Parent-only 1,195.14 117.85 2,166.88 14.02
Consolidated 1,501.71 123.03 2,434.82 16.12
Percent 80 96 89 87
Quartile 3
Parent-only 316.21 24.87 580.12 34.20
Consolidated 380.08 25.46 652.64 31.36
Percent 83 98 89 109
Quartile 4
Parent-only 39.14 0.02 130.80 1.74
Consolidated 50.47 0.76 149.98 3.50
Percent 78 3 87 50
All-firms
Parent-only 19,088.10 1,851.04 43,928.75 2,016.86
Consolidated 24,301.95 2,162.21 52,903.93 2,609.19
Percent 79 86 83 77
Sample
Parent-only 2,189.95 359.59 3,746.80 346.11
Consolidated 4,763.32 585.88 5,790.19 650.69
Table II.
Percent 46 61 65 53
Financials of firms with at
least one subsidiary firms Note: 1 Rupee ¼ US $0.021
 Table III shows the number of companies that meet our criteria of minimum 20 percent Consolidated
revenue between 2002 and 2008. The table also provides the number of companies in financial
which the asset base of subsidiaries is a minimum of 20 percent of the consolidated
asset base. Although CFS was introduced in the year 2001, the number of firms statements
with 20 percent subsidiary earnings was only 40 for the accounting year ended
March 2002 and increased every year. At the beginning of our sample period
(2004-2005), the number of firms with minimum subsidiary revenue of 20 percent was 65
70. Of the 70 firms, 11 firms were dropped from our sample because their subsidiary
earnings declined below 20 percent in subsequent years or they are merged with other
firms. Our sample consists of 59 firms whose subsidiary earnings are more than 20
percent during the entire study period. We examine the value relevance of CFS of 236
firm observations between 2004-2005 and 2007-2008.
Table IV shows that the relative importance of subsidiaries in the sample firms has
increased over the study period. For example, the subsidiary sales to consolidated sales
of the sample in 2004-2005 was 27.16 percent and have increased to 54.02 percent in
2007-2008. During the same period, profit after tax of the subsidiary firms has
increased from 14.11 to 38.62 percent. Similarly, the assets have doubled from 17.12 to
35.29 percent.
Asian Review of Accounting 2012.20:58-73.

Earlier studies on value relevance of financial information examine the association

between accounting measure and value of stock. In the absence of any abnormal
earning, the value of stock is equal to its book value. In value relevance literature, the
value of stock is generally specified as a linear function of book value of owners’ equity
and earnings (Ohlson, 1995). Following Abad et al. (2000), we expect the stock price to
be positively related to book value (BV) and earnings. As investors in India receive
both parent-only earnings and consolidated earnings, we include both parent-only
earnings (PE) and consolidated earnings (CE) in the valuation equation. Thus, our

Number of firms
Year Sales revenue Assets

2001-2002 40 27
2002-2003 54 30
2003-2004 67 36 Table III.
2004-2005 70 47 Number of firms where
2005-2006 78 65 sales and asset of
2006-2007 103 78 subsidiaries are greater
2007-2008 107 90 than 20 percent

2004-2005 (%) 2005-2006 (%) 2006-2007 (%) 2007-2008 (%)

Sales 27.16 34.11 37.65 54.02

Assets 17.12 19.76 26.42 35.29
Cash flow 17.26 14.43 31.86 46.81 Table IV.
Profit after tax 14.11 17.57 24.46 38.62 Share of key financials of
Subsidiary net profit/asset 9 7 9 11 subsidiaries in
Consolidated net profit/asset 10 10 10 10 consolidated numbers
 ARA basic price equation is specified as follows:
20,1 Pt ¼ a0 þ a1 BVt þ a2 PEt þ a3 CEt
In this study, we first examine the value relevance of consolidated earnings and parent-
only earnings using annual data and subsequently using quarterly data. As our data
consists of multiple years, we use fixed effect panel data regression model to examine
66 the relation between value of stock, accounting earnings and cash earnings. We also
perform additional tests to consider firms reporting positive (negative) parent-only
earnings and negative (positive) consolidated earnings or operating cash flows as the
valuation of the loss-making and profit-making firms may be different.
Our fixed effect models are described as follows:

Model 1 : Pit ¼ ðb0 þ ujÞ þ b1 PEit þ b2 PBVit þ b3 CEit þ eit

Model 2 : Pit ¼ ðb0 þ ujÞ þ b1 PEit þ b2 PBVit þ b3 CEit þ b4 PCFit þ b5 CCFit þ eit

where Pit, is the market capitalization of the firm in year t for firm i; PEit, the parent-
only earnings in year t for firm i; CEit, consolidated earnings in year t for firm i; PCFit,
Asian Review of Accounting 2012.20:58-73.

parent-only operating cash flows in year t for firm i; CCFit, consolidated operating cash
flows in year t for firm i; b1 to b5, slope coefficients of unexpected earnings and cash
flows of parent and consolidated statements; eit, error term, uj, year difference from the
intercept and b0, Intercept term.
In Models 3 and 4, we group the data into three categories:
(1) firms in which both consolidated and parent-only earnings are positive;
(2) firms in which both consolidated and parent-only earnings are negative; and
(3) firms in which consolidated and parent-only earnings are of different sign.
Using dummy variables for (1) and (2), we examine whether the market reacts
differently when consolidated and parent-only earnings have changed over the
previous year in an opposite direction:

Model 3 : Pit ¼ b0 þ b1 PEit þ b2 PBVit þ b3 CEit þ b4 D1 þ b5 D2 þ eit

D1 is 1, if both PE and CE are positive else zero. D2 is 1 if both PE and CE are negative
else zero. D1 and D2 are zero if parent-only and consolidated earnings are of different
sign.
Although earning announcement contains incremental information, it may not
contain significant new information as firms provide substantial information to the
market from time to time. Firms provide quarterly information and continuous
disclosure that are perceived to be price sensitive such as bonus issue, change in chief
executive, and closure of factory, etc. We further extend our study to include quarterly
earnings announcements and the stock returns. Our model to test the quarterly
earnings relevance follows Model 1.

5. Results
5.1 Analysis of annual consolidated earnings
Descriptive statistics and correlation matrix of the variables used in the regression
equation are reported in Table V. The correlations between the earnings, price and
book value are strong. Abad et al. (2000) also find strong correlation between these
 Market capitalization BV PE CE PCF CCF
Consolidated
financial
Distributional statistics statements
Mean 81.2163 4.8450 6.6232 23.2774 7.4754 5.1159
Lower quartile (first) 7.7348 0.3355 0.3720 2.7331 0.1856 0.1233
Median 21.0574 0.8290 1.0453 6.1199 0.8539 0.5223
Upper quartile (third) 2,097.2715 167.0165 202.2113 706.1740 270.9423 222.1404 67
Standard deviation 240.2549 19.9679 24.5342 78.7423 32.2882 25.7737
Correlation
Market capitalization 1.0000
BV 0.9750 1.0000
PE 0.9693 0.9835 1.0000
CE 0.9519 0.9718 0.9577 1.0000
PCF 0.0530 0.0377 0.0097 0.0042 1.0000
Table V.
CCF 0.0608 0.0324 0.0034 0.0010 0.9657 1.0000
Descriptive statistics of
Notes: BV, book value; PE, parent-only earnings; CE, consolidated earnings; PCF, parent-only cash earnings, operating cash
flow; CCF, consolidated cash flow flows and return
Asian Review of Accounting 2012.20:58-73.

variable using Spanish data. On the other hand, earnings and cash flows are weakly
correlated[9].
Table VI shows results of various models. The results of our initial models fail to
support the hypothesis that the disclosures of consolidated earnings provide additional
information in the Indian context. In Model 1, we considered parent-only and
consolidated accrual earnings and find parent-only earnings is positively associated
with the stock price. Model 2 considered both accrual-based earnings and cash flow
from operating activities. Although the parent-only accrual earnings continue to
explain the stock price, the consolidated accrual earnings is not value relevant.
However, the consolidated cash flow explains the prices, which provides some evidence
of value relevance of consolidated number. Following Hellström (2006), we use an
alternative pricing model in which we deflated all the variables by the opening book
value of the parent company to address the size differences between the firms and
years and high correlation observed between the regression variables in our earlier
price model[10]. The results of the modified price model reported below are consistent
with our earlier price model (Model 1):

Pit =BVit1 ¼ 2:4929 þ 2:2609 BVit =BVit1 þ 1:2002 PEit =BVit1

ð3:5291 Þ ð4:1964 Þ ð2:7266 Þ

þ 0:1067 CEit =BVit1 þeit

ð0:1761Þ

Adjusted R2 ¼ 0:6306 F-value : 7:2689

We also perform return model in which we regress the market adjusted stock return on
rate of change in the abnormal earnings for parent-only earnings and consolidated
earnings (Niskanen et al., 1998). The return model also shows that the parent-only
earnings are significantly explaining the market-adjusted return.
Results of interaction test. To determine whether consolidated earnings,
consolidated cash flow from operating activities, parent-only operating cash flows
have information content when they have a different signs compared with parent-only
 ARA Model 1 Model 2 Model 3 Model 5 Model 6
20,1
Number of observations 236 236 236 88 148
Intercept 1.3551 9.5141 3.1824 31.4017 11.1959
t-value 0.2341 1.5674 0.1024 3.2502** 1.4107
PBV 1.3956 1.5911 1.3037 1.0751 1.7243
68 t-value 4.5904** 5.3447** 4.1439** 2.8929** 3.8929*
PE 10.5522 9.4620 11.1296 0.3329 15.7089
t-value 6.8390** 6.2394** 6.8562** 0.1104 4.8910**
CE 0.1572 0.3171 0.0568 1.6770 4.0027
t-value 0.2345 0.4891 0.0838 2.2700* 1.6697
PCF 0.7304
t-value 0.9776
CCF 0.8314
t-value 2.1225*
Dummy 1 – 7.4287
t-value 0.2384
Dummy 2 – 10.3432
t-value 0.3030
Asian Review of Accounting 2012.20:58-73.

F-value 146.3329 152.6959 141.3930 30.0852 190.8983

Table VI.
Adjusted R2 0.9754 0.9771 0.9753 0.9003 0.9819
Results of fixed
effect regression and Notes: *5 percent significance; **1 percent significance. BV, book value; PE, parent-only earnings; CE,
interaction test consolidated earnings; PCF, parent-only cash flow; CCF, consolidated cash flow

earnings, dummy variables for both positive and both negative cases were used as in
prior research (see Kane et al., 1984; Niskanen et al., 1998). The results of Models 3 and
4 are reported in Table VI.
The model which compares the information content of parent-only and consolidated
earnings again confirms the absence of the information content of consolidated
earnings. None of the dummy variables and intercept shows significance in Model 3.
The parent-only earnings continue to report positive and significant relationship with
the price. In Model 4, both cash flow variables fail to provide any additional
information. We examine the reason for the market not showing any importance to
consolidated earnings in the next section.

5.2 Analysis of quarterly consolidated earnings

The absence of value relevance of consolidated earnings is not only inconsistent with
the recent studies but also surprising when we find parent-only accrual earning is
value relevant. It was equally puzzling particularly when subsidiary earnings of the
sample firms are significant and increasing over the study period (Table III). Our
findings question the belief that consolidated earnings are superior and contain more
information than parent-only earnings. There is no satisfactory explanation why the
market uses parent-only earnings when consolidated earnings are available for use
particularly when subsidiary earnings are significant. The value irrelevance of CFS
could be on account of use of annual CFS whereas investors track quarterly earnings
and might use the same in valuation. Although regulation requires mandatory
disclosure of parent-only earnings on quarterly basis, it is not mandatory to disclose
CFS on quarterly basis. According to SEBI regulation, companies with subsidiaries
have an option to submit quarterly CFS in addition to standalone financial results.
That is, quarterly consolidated earnings reporting are not mandatory whereas
 reporting of consolidated earnings at the end of the year is mandatory. The reason for Consolidated
not making quarterly consolidated reporting mandatory is not provided in any official financial
sources. Companies can delay the reporting of quarterly earnings for one more month
by opting to disclose consolidated financial reporting. While some companies issue statements
CFS on quarterly basis, many companies do not provide CFS despite having significant
subsidiary earnings. Of the 59 sample companies, 22 companies have consistently
provided quarterly earnings during the study period between March 31, 2004 and 69
March 31, 2008 (17 quarterly earnings). We examined the value relevance of CFS using
quarterly data of these 22 companies using the fixed effect model. We had to drop cash
flow variables since there is no requirement to provide cash flow statement on
quarterly basis and no company provides cash flow statement on quarterly basis. As
quarterly balance sheet is not mandatory in India, we had to drop the book value also
from our basic equation. Model 4 is based on Model 1 and modified as follows:

Model 4 : Pit ¼ b0 þ b1 PEit þ b2 CEit þ eit

In the above equation, time “t” is quarterly and PE and CE are quarterly parent-only
and consolidated earnings. The estimated regression equation is as follows (t-values in
Asian Review of Accounting 2012.20:58-73.

parentheses):

Pit ¼ 15:0831 þ 19:0712 PEit þ 17:4239 CEit þeit

ð3:0316Þ ð2:6005 Þ ð6:4970 Þ
2
Adjusted R ¼ 0:8093 F-value : 39:5190

The parent-only earnings continue to be significant and in addition, the consolidated

earnings are also significant. The t-value shows that the consolidated earnings are of
relatively higher significance than the parent-only earnings[11]. As the results
confirming value relevance of consolidated earnings could be on account of reduced
sample, we examine whether consolidated annual earnings are significant for the same
sample, which provide quarterly consolidated earnings. We split the 59 firms into two
groups: Group (1) which consists of 22 firms that provide quarterly consolidated
earnings in addition to annual consolidated earnings and Group (2) which consists of
37 firms that provide only annual consolidated earnings. We run the regression using
Model 1 again for these two sub-samples with annual consolidated earnings and
parent-only earnings. Our Models 5 and 6 are similar to Model 1. Model 5 is based on
companies which report consolidated quarterly earnings whereas Model 6 consists of
companies which do not provide consolidated quarterly earnings. These results are
reported in Table VI.
The annual consolidated earnings turn significant when firms provide quarterly
consolidated earnings (Model 5) whereas the parent-only annual earnings fail to
explain the price. On the other hand, parent-only earning is significant when firms are
not providing quarterly consolidated earnings. The consolidated earnings is not
significant when firms are not giving quarterly consolidated earnings (Model 6). That
is, when firms are not giving consolidated earnings on quarterly basis and provide
parent-only earnings on quarterly basis, investors follow the same over the quarters
and hence parent-only earnings alone dominates the relationship between value and
earnings. On the other hand, when firms give consolidated earnings on quarterly basis,
investors follow consolidated earnings in addition to parent-only earnings. Thus the
value relevance of consolidated earnings depends on its consistency of disclosure. The
 ARA results also explain why consolidated cash flow turns significant in Model 2. The
20,1 consolidated cash flow information is additional information even for firms which
provide only quarterly parent-only earnings and this additional information is
captured in the price.

6. Conclusion
70 Indian companies are mandated to provide CFS since 2001 as part of the harmonization
and now the convergence program with IFRS. Until 2001, Indian companies were
preparing parent-only financial statements. In view of the increasing trend in the
number of companies with more subsidiaries as well as value of subsidiary earnings
(Table I), the move of the regulating agencies mandating the companies to provide
CFS is important in the Indian context. As the number of overseas acquisitions have
gone up from 2007 with multi billion dollar deals, it is imperative that CFS becomes
more relevant for the investors. This paper extends the extant literature by examining
the value relevance of CFS over the parent-only statements and statement of cash
flow for a large emerging market such as India. Our initial results based on annual
consolidated and parent-only accrual earnings and operating cash flows between
2005 and 2008 show that parent-only accrual earnings provide significant
Asian Review of Accounting 2012.20:58-73.

explanation to market value. However, the results based on firms which provide
quarterly consolidated earnings show that consolidated earnings is value relevant
whereas parent-only earning is not value relevant. While the regulation mandates
consolidated earnings disclosure on a yearly basis, it provides an option to firms to
disclose consolidated earnings on quarterly basis. When the regulator gives an
option to the firms to report or not to report consolidated quarterly earnings,
prices reflect parent-only earnings on quarterly basis in the absence of consolidated
quarterly earnings.
The results of the study are significant for three reasons. First, we report that
accounting information is value relevant in a large emerging market such as India.
Second, consolidated earnings are value relevant when firms disclose consolidated
earnings every time they report parent-only earnings. Investors ignore consolidated
earnings if firms report parent-only earnings on a quarterly basis and restrict
consolidated earnings reporting on an annual basis. The consolidated cash flow is
value relevant for all firms since it is provided on annual basis. Third, we provide
evidence on how inconsistencies in regulations defeat the very purpose for which it
was mandated. The regulating agency that mandated consolidated earnings under the
belief that it would be useful to investor should naturally mandate the same when
quarterly earnings are reported. In this case, MCA which requires reporting of
consolidated earnings on annual basis has no authority in mandating quarterly
reporting in India. SEBI requires the listed companies to provide quarterly earnings.
When consolidated reporting was mandated by MCA, SEBI should have mandated the
same for quarterly reporting. Instead, SEBI gave an option to companies about
providing consolidated quarterly reporting. Many companies opted out of providing
quarterly consolidated earnings thus not serving the investors interest. This
inconsistency also highlights the fact that, when multiple agencies are involved in
accounting regulation, lack of co-ordination between them, will result in poor
implementation and enforcement of standards. India is moving toward adoption of
IFRS to converge with international standards. However, lack of interaction between
various regulatory agencies may lead to inconsistencies in regulation which affects the
value relevance of accounting information.
 Notes Consolidated
1. Department of Industrial Policy and Promotion (http://dipp.nic.in/fdi_statistics/ financial
india_FDI_May2009.pdf).
statements
2. Reserve Bank of India (www.rbi.org.in/scripts/Data_Overseas_Investment.aspx).
3. Indian Accounting Standard 3: Cash flow statements.
4. For example, Kumaramanglam Birla Committee for Corporate Governance, the Naresh 71
Chandra Committee for Market Reforms and the J. J. Irani Committee for Company Law
Reforms.
5. Seventh Council Directive 83/349/EEC of June 13, 1983 based on the Article 54(3)(g) of the
treaty on consolidated accounts.
6. In our regression model, two independent variables (parent-only earnings and consolidated
earnings) will have identical value for 76 percent of the sample and another 14 percent of the
sample will have negligible difference between the two values.
7. The accounting year of Indian companies are generally April 1 to March 31 and 2004-2005
here means April 1, 2004 to March 31, 2005.
Asian Review of Accounting 2012.20:58-73.

8. We have also drawn our sample using 10 percent subsidiary revenue filter, which resulted in
71 firms. The result (parent-only earnings is value relevant) is consistent with our present
sample. The R2 value is however lower than our present model. When we reduce the filter
further, it increases the sample companies but the relationship turned statistically
insignificant with low t-values and negligible R2.
9. To handle this high correlation between the regression variables, we have deflated all the
variables by the opening book value of equity following Hellström (2006). This alternative
price model reduces the correlation between the variables. We produce the results of these
alternative models subsequently.
10. The correlation between the regression variables in modified price model is less than 0.50.
11. The results of the return model on quarterly earnings also confirm significance of
consolidated quarterly earnings. In the return model, the parents-only quarterly earnings is
not statistically significant.

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Further reading
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IASB, London, p. 1234.

Corresponding author
M.S. Narasimhan can be contacted at: msn@iimb.ernet.in

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