Relevance of earnings and book value: Evidence from listed pharmaceutical companies

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Abstract

For accounting information to be useful for decision making it is essential that it is relevant for decision-making and should have a significant relation with stock prices or stock returns. Value relevance research aims to explain the impact of accounting information on stock prices or stock returns. This study examines the value relevance of earnings and book values on listed Indian pharmaceutical companies’ stock prices by using the Ohlson price model. The study gathered a series of panel data from 2006 to 2015 from the Nifty Pharma index. Ordinary least square and panel regression estimation were done using EViews. The findings provide sufficient evidence of those earnings per share (EPS) and book value per share (BVPS) jointly and individually for the Nifty Pharma index sample played an essential role in influencing stock prices. However, there is an insignificant decline in the combined value relevance of EPS and BVPS. The findings reveal that the EPS and BVPS played an important role in influencing stock prices. However, explanatory powers of EPS and BVPS in all years are significantly lower than that of developed countries. Overall findings show mixed results on the considerable influence of firm size on the value relevance of accounting information. This study’s findings have implications for analysts, investors, and other market participants; they should use EPS and BVPS in the equity valuation of pharmaceutical companies for better allocation of resources in capital markets.

Keywords: Stock Market, Ohlson Model, Nifty, Stock Prices, Firm Size, Accounting Information

Authors’ individual contribution: Conceptualization – M.B.; Methodology – M.M. and M.B.; Formal Analysis – M.M.; Investigation – M.M.; Resources – M.M. and M.B.; Data Curation – M.M.; Writing – Original Draft – M.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G11, G12, M41

Received: 27.07.2020
Accepted: 16.10.2020
Published online: 20.10.2020

How to cite this paper: Mulenga, M., & Bhatia, M. (2020). Relevance of earnings and book value: Evidence from listed pharmaceutical companies. Corporate Ownership & Control, 18(1), 196-206. https://doi.org/10.22495/cocv18i1art15