Do Accounting Numbers Have Any Relation with Stock Prices? A Case of Public and Private Sector Banks of India

Meena Bhatia,Mwila Joseph Mulenga

doi:10.4236/tel.2019.95107

Abstract

Capital market research examines the ability of accounting numbers to influence the stock prices thus stock returns. This paper attempts to study the association between the accounting variables and stock price for banking sector in India and also to explore whether same variables influence the stock price of private and public sector banks in India. Nine accounting variables for the period of ten years have been studied for BSE listed banks. The study used panel least regression analysis by incorporating Fixed effect model (FEM) and Random effect model (REM), where nine set of accounting variables regressed against market share price of private and public sector banks for a period of 10 years from 2005 to 2014. The empirical findings revealed that, out of nine independent variables used; the earnings per share, book value per share, assets turnover and current ratio were significant in private sector banks and earnings per share, book value per share, return on equity and net non-performing assets ratio were significant in public sector banks. Overall empirical findings reported that the fundamental accounting variables in public sector banks are more relevant than that of private sector banks and this supports the hypothesis of the study. This is against the notion raised in 90s that accounting information has become less value relevant.

Highlights

IntroductionThe objective of financial reporting is “to provide information that is useful to present and potential investors and creditors and others in making investment, credit and similar resource allocation decisions”
Overall empirical findings reported that the fundamental accounting variables in public sector banks are more relevant than that of private sector banks and this supports the hypothesis of the study
Overall empirical findings reported that accounting information in public sector banks is more relevant than that of private sector banks and this supports the hypothesis of the study that there is significant difference in the value relevance of accounting information between public sector banks and private sector banks

Summary

Introduction

The objective of financial reporting is “to provide information that is useful to present and potential investors and creditors and others in making investment, credit and similar resource allocation decisions”. For accounting information to be useful for decision making it is essential that it is relevant for decision making. It should truly capture the economic substance of the transactions, events, or circumstances it describes and the information needs to be complete, neutral and free from material errors [1]. 26) considers financial statement information to be relevant when it has the ability of influencing user’s economic decision by helping them to evaluate past, present and future events and correcting their past evaluation IASB (2001, p. 26) considers financial statement information to be relevant when it has the ability of influencing user’s economic decision by helping them to evaluate past, present and future events and correcting their past evaluation

Methods

Results

Conclusion