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Value Relevance, Earnings Management, and Corporate Governance in India
Research has been undertaken into the value relevance of accounting information and earnings management on stock valuation and into the moderating effects of corporate governance, but little research has been conducted into their nexus. A comprehensive examination provides empirical evidence that earnings management affects the value relevance of accounting information and that good governance can reduce the practice among Indian firms. An improvement in accounting standards may raise the confidence of potential investors in Indian firms, and policymakers and regulators may promulgate standards of codes and guidelines to improve the governance practices of Indian firms.
The authors thank the anonymous reviewer for their comments on an earlier version of this paper, which helped to improve it.
The fundamental work on the relationship between accounting earnings and stock returns (Ball and Brown 1968), and on value relevance (Ohlson 1995), generated interest among researchers in exploring the informational content of accounting information. The focus, initially on markets in the United States, diffused to Canada and Australia (Barth and Clinch 1996) and to Europe—the United Kingdom (Alford et al 1993), France, Germany, and the Netherlands (Harris et al 1994).
Asian economies were rapidly integrating with global markets and undergoing structural change, and their inclination towards value relevance in accounting practices was even stronger. The market settings of Asian economies are unique, and their capital markets are evolving fast, and these offer governance practices and reporting standards new challenges. These changing paradigms make it imperative to pay attention to value relevance, as paying attention to value relevance may reduce informational asymmetry and minimise the adverse selection problem of investors (Lundholm and Van Winkle 2006).
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