Abstract
This paper aims to analyze the value relevance of financial statements prepared according to International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS). The study focuses on two of the different sets of accounts presented by companies: the parent company financial statement and the consolidated version. We have developed a panel data from a sample of Italian listed companies by collecting accounting figures from consolidated and separate financial statements, since Italy mandates listed companies to prepare both reports according to IAS/IFRS. Using an Ohlson price model, we have tested our hypotheses, performing regressions of share price or market capitalization on book value and earning. Firstly, we compared the consolidated financial reports’ value relevance with that of the separate financial statements. The evidence suggests that, although the separate reports also have a high value relevance, this does not provide investors with additional information. Secondly, we investigated the value relevance of the consolidated financial statements alone, by focusing on the specific nature of the group’s equity book value and net income. Both are made up of two components: one referring to the parent company and the other attributable to non-controlling interests (NCI) as a consequence of the presence of minority shareholders within the group. We analyzed the value relevance of group financial statements, taking into account the presence/absence of minority shareholders and their portion of equity and net income. By dividing groups with minority shareholders from groups without these, we verified whether the presence of non-controlling interests can affect the value relevance of consolidated reports, and whether NCI equity and net income are value-relevant. In fact, all modes used to test value relevance are based only on the parent company equity and net income, leaving aside that group equity and net income are divided into two parts. The evidence suggests that NCI financial values slightly increase the fit of the model, and that NCI equity and net income are statistically significant in affecting the market capitalization of companies. Key words: International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS), value relevance, equity, accounting.
Highlights
The objective of financial statements for general purposes is highlighted by the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) framework, which states, among other qualitative characteristics of financial information, that “the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors...” and “decisions by existing and potential investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, for example dividends, principal and interest payments or market price increases” (The Conceptual Framework for Financial Reporting, OB2 and OB3)
Using these two versions of Ohlson model (OM), we applied and adapted them to consider the main features of the two sets of accounts we considered in our analyses: consolidated financial statements and parent companies’ separate annual reports
We have followed this approach, but we have introduced some changes in order to adapt the price models to the specific features of consolidated and separate financial statements and to the specific components of group equity and net income
Summary
Value relevance is one of the most important attributes of accounting quality (Francis et al, 2004), since. The value relevance studies carried out in this research stream are based on the financial figures reported in annual reports, such as equity book value and net income. Almost all analyses developed in this direction have considered the market value or the share price of listed companies and their publicly available financial statements as the source of accounting figures. The purpose of this paper is to investigate the value relevance of Italian financial reports prepared according to IFRS by considering both sets of publicly available accounts. The analysis firstly aims to measure the value relevance of both separate and consolidated financial statements when prepared according to the same GAAPs. Second, this study evaluates which set of accounts might be more useful in making investment choices. No studies have dealt with the NCI portion of equity and net income reported in consolidated financial statements
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