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

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