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.
The financial reporting system has been evolving in the world; detailed and demanding accounting principles and standards are augmented by extensive disclosure requirements. When FASB and IASB set standards for financial reporting, they make many judgments and they formulate standards by keeping in mind the objective of financial reporting. 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 also 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 [
Research that examines the relationship between financial statement information and capital markets is referred to as capital markets research; it originated from seminal work of [
Value relevance studies are designed to assess whether particular accounting amounts reflect information that is used by investors in valuing equity [
Close to half of the annual report comprises of financial statements and related information, for an investor it is essential to identify the relevant information to assess the business performance and position and to evaluate the ability of the business to generate future earnings [
For conducting the analysis so as to compare the value relevance accounting information between private and public sector banks, the study used the list of Indian banks listed in Indian stock market; and to test the relative association study used a set of nine independent accounting variables. Many of these accounting variables are unique to banking sector and users of financial statements use them for evaluating past and future financial performance and position of the banks. This study not only adds to the value relevance literature by comparing value relevance of accounting information between Indian private and public sector banks but also has considered additional variables not considered by other studies and as per the findings few of the additional variables are significant too.
The findings of our study indicated that, out of nine independent variables used, four variables are significant of which two are common for public and private sector banks. 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.
The structure of this paper is organized as follows. The review of empirical literature is covered in Section 2, methodology used is discussed in Section 3. Section 4 focuses on empirical findings and analysis, conclusion and recommendation of the study are reflected in Section 5, and Section 6 is for limitation and suggestion for future research.
The literature examining the association between stock price and accounting information extends back over 50 years [
The theoretical framework of equity valuation originated from the Ohlson model [
[
An incremental association study by [
In Indian context few value relevance studies have been conducted. [
As evident from the literature no empirical study in Indian context compared value relevance of accounting information between private and public sector banks, therefore this present study aimed to fill the gap in literature.
1) Do accounting numbers have any relation with stock price of private and public sector banks of India?
2) Is there any significant difference in the relative association of accounting information and stock price between private and public sector banks?
The data required for the study is sourced from three sources, 1) the annual financial reports, 2) prowess database maintained by the Center for Monitoring the Indian Economy (CMIE) and 3) Reserve Bank of India official website. There are 40 banks listed on Bombay Stock Exchange and/or National Stock Exchange, we had to drop three banks as the relevant information was missing for these banks. The constituents of the study are given in
Model Specification
To test the relationship, market shares prices regressed against nine set of accounting variables. Description of the variables is given in
No. | Public sector banks | No. | Private sector banks | ||||
---|---|---|---|---|---|---|---|
1 | Andhra Bank | 14 | Punjab National Bank | 1 | Axis Bank | 14 | Yes Bank |
2 | Allahabad | 15. | Syndicate Bank | 2 | City Union Bank | ||
3 | Bank of Baroda | 16. | State Bank of India | 3 | Dhanlaxmi Bank | ||
4 | Bank of India | 17. | State Bank of Mysore | 4 | DCB | ||
5 | Bank of Maharashtra | 18. | State Bank of Bikaner | 5 | Federal Bank | ||
6 | Canara Bank | 19 | State bank of Travancore | 6 | HDFC Bank | ||
7 | Corporation Bank | 20. | United Bank of India | 7 | ICICI Bank | ||
8 | Central Bank of India | 21. | Union Bank of India | 8 | Indusind Bank | ||
9 | Dena Bank | 22. | UCO Bank | 9 | Jammu and Kashmir | ||
10 | IDBI Bank | 23. | Vijaya Bank | 10 | Karnataka Bank | ||
11 | Indian Overseas | 11 | Kotak Mahindra | ||||
12 | Indian Bank | 12 | Lakshmi Vilas Bank | ||||
13 | Oriental Bank of Commerce | 13 | South Indian bank |
S/No. | Type of Bank | Number |
---|---|---|
1 | Private Sector Bank | 14 |
2 | Public Sector Bank | 23 |
Total | 37 |
M S P i t = α 0 + β 1 E P S i t + β 2 B V P S i t + β 3 R O E i t + β 4 A T R i t + β 5 C R i t + β 6 N I M i t + β 7 C A R i t + β 8 N P A i t + β 9 C A S A i t + ε i
1) Earnings per share: Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock and used as an indicator of firms’ profitability [
2) Book value per share: Book value per share is considered as a very important accounting information in measuring amount of assets the company has on behalf of each equity share [
3) Return on equity: It is measure of profitability and is an indicator of firms’ efficiency and focused on measuring amount of profit generated by the company using amount of money invested by a shareholder in the company [
4) Assets turnover ratio: Assets turnover ratio used as independent variable in this study, the ratio defined as part of efficiency ratio aimed in measuring ability
Name | Nature | Formula | Description |
---|---|---|---|
MSPit | Dependent variable | Closing market price | Market share price of firm i at time t represented by closing price at end of financial year |
Α | Independent | Captures the influence of variables that have been excluded from the model but exercise some influence on the dependent variable | |
EPSit | Independent variable | Earnings attributable to ordinary shareholders Total amount of outstanding ordinary shares | Earnings per share of firm i at time t |
BVPSit | Independent variable | Equity share capital + shareholders reserves Total number of outstanding ordinary shares | Book value per share of firm i at time t |
ROEit | Independent variable | Net income/Shareholder’s equity | Return on equity of firm i at time t |
ATRit | Independent variable | Total amount of sales or turnover/Total amount of assets | Assets turnover ratio of firm i at time t |
CRit | Independent variable | Current assets/Current liabilities | Current ratio of firm i at time t |
NIMit | Independent variable | Net interest income/Average interest earnings assets | Net interest margin of firm i at time t |
CARit | Independent variable | Tier I capital + Tier II capital/Risk weighted assets | Capital adequacy ratio of firm i at time t |
Net NPAit | Independent variable | Net non-performing assets/Loans given | Net Non Performing Assets |
CASAit | Independent variable | Deposit in Current account and Savings account Total amount of deposits | Current account and Savings account deposits ratio of firm i at time t |
T | Time | Represents the number of years covered for this study | 2005, ∙∙∙, 2014, corresponding to the years 2006-2014 |
of the company in utilizing its assets for the purpose of generating company’s sales. According to [
5) Current ratio: Current ratio is a part of liquidity ratio which is mostly used in measuring ability of the companies to meet is short term obligation [
6) Net interest margin: Business of banks is primarily concerned with expected returns [
7) Capital adequacy ratio: The capital adequacy ratio (CAR)also known as Capital to risk weighted assets ratio (CRAR) used in measuring amount of bank’s capital in relation to the amount of its credit exposures. The ratio expressed as a percentage of bank’s capital to its risk weighted credit exposures and used as a measure of bank’s financial strength and stability. Banks with high capital adequacy ratio are considered to be safe, in case its loans are not going well they can make up for it from its net worth.
8) Net non-performing assets ratio: Non-performing assets (NPA) considered as the major concern for the Indian banks because the ratio used as indicator of the financial health of the banking sector and credit risk [
9) Current account and saving account ratio: It is used to show the amount of deposits a bank has in form of current account and savings account of the total amount of deposits. For the banks with higher ratio of current deposits and savings deposits, it is considered to be a good signal as funds available through these two deposits have very low cost. As far as our knowledge none of the previous studies considered this variable, but the stock market analysts have always accorded high value to this ratio of banking industry. Therefore we have included it in our study.
This study uses Fixed effect model (FEM) and Random effect model (REM) to conduct the analysis, as it considers the effect of systematic differences between the firms as compared with OLS which assumes that model parameters are constant across all firms [
Variables | MSP | EPS | BVPS | ROE | ATR | CR | NIM | CAR | NPA | CASA |
---|---|---|---|---|---|---|---|---|---|---|
Public Sector Banks | ||||||||||
Mean | 546.4 | 68.21 | 416.4 | 15.50 | 0.10 | 0.03 | 2.64 | 12.55 | 1.39 | 32.82 |
Median | 144.4 | 23.77 | 153.2 | 15.61 | 0.09 | 0.03 | 2.66 | 12.52 | 1.19 | 32.35 |
Std. Deviation | 1247.1 | 129.85 | 678.2 | 6.42 | 0.09 | 0.03 | 0.61 | 1.21 | 0.92 | 6.70 |
Minimum | 22.2 | −28.68 | 0.00 | −31.32 | 0.05 | 0.01 | 0.23 | 9.21 | 0.15 | 14.59 |
Maximum | 9675.6 | 885.71 | 3827.3 | 29.85 | 0.09 | 0.45 | 3.98 | 18.16 | 7.18 | 49.82 |
Private Sector Banks | ||||||||||
Mean | 368.6 | 27.44 | 192.7 | 11.68 | 0.10 | 0.04 | 2.91 | 14.04 | 1.23 | 27.75 |
Median | 188.7 | 16.95 | 116.5 | 14.11 | 0.10 | 0.03 | 2.81 | 13.47 | 0.83 | 25.05 |
Std. Deviation | 389.2 | 38.89 | 209.2 | 11.84 | 0.01 | 0.03 | 0.81 | 2.72 | 1.55 | 11.00 |
Minimum | 21.4 | −25.23 | 10.9 | −66.51 | 0.04 | 0.01 | 1.08 | 8.67 | 0.00 | 1.38 |
Maximum | 2034.0 | 243.92 | 1180.3 | 32.30 | 0.14 | 0.15 | 5.62 | 22.46 | 14.11 | 60.65 |
The relationship between accounting variables and market share prices was measured by using the Pearson’s Correlation analysis. As indicated in
In private sector, MPS is positively correlated with all accounting variable except NPA have negative correlation with MSP. The highest and strong positive correlation of 0.699 is reported between CASA and MPS followed by BVPS (0.631). The results from Pearson’s correlation coefficient in
Variables | MSP | EPS | BVPS | ROE | ATR | CR | NIM | CAR | NPA | CASA | |
---|---|---|---|---|---|---|---|---|---|---|---|
Public sector banks | |||||||||||
MSP | 1 | 0.932** | 0.911* | 0.191 | 0.250* | −0.023 | 0.192 | −0.049 | −0.132 | 0.108 | |
EPS | 1 | 0.964 | 0.235 | 0.321 | −0.043 | 0.202 | −0.028 | −0.115 | 0.076 | ||
BVPS | 1 | 0.123 | 0.300 | −0.034 | 0.217 | −0.051 | −0.035 | 0.112 | |||
ROE | 1 | 0.037 | −0.053 | 0.346 | 0.215 | −0.658 | 0.046 | ||||
ATR | 1 | −0.037 | 0.049 | −0.089 | 0.049 | −0.099 | |||||
CR | 1 | −0.077 | 0.333 | 0.095 | 0.193 | ||||||
NIM | 1 | 0.040 | −0.116 | 0.536 | |||||||
CAR | 1 | −0.283 | 0.050 | ||||||||
NPA | 1 | 0.074 | |||||||||
CASA | 1 | ||||||||||
Private sector banks | |||||||||||
MSP | 1 | ||||||||||
EPS | 0.577** | 1 | |||||||||
BVPS | 0.631** | 0.956 | 1 | ||||||||
ROE | 0.253 | 0.343 | 0.207 | 1 | |||||||
ATR | 0.188 | −0.065 | −0.116 | 0.231 | 1 | ||||||
CR | 0.202 | −0.104 | −0.058 | 0.025 | 0.255 | 1 | |||||
NIM | 0.445** | 0.238 | 0.174 | 0.391 | 0.408 | 0.244 | 1 | ||||
CAR | 0.335 | 0.232 | 0.280 | 0.260 | 0.159 | 0.257 | 0.374 | 1 | |||
NPA | −0.269 | −0.291 | −0.212 | −0.527 | −0.119 | −0.119 | 0.029 | −0.214 | 1 | ||
CASA | 0.699** | 0.529 | 0.578 | 0.098 | −0.017 | −0.038 | 0.435 | 0.164 | −0.163 | 1 | |
Note: **Significant at p < 0.01; *Significant at p < 0.05.
1) Earnings per Share:
- Coefficient of EPS is positive and significant at 1% level for public sector banks. These results indicate that there is positive association between the performance of the business as measured by earnings per share and market share price.
- The regression coefficient of EPS in private sector banks is significant at p < 0.10 and depicts a positive association with market share prices.
The findings are in line with the findings of [
2) Book Value per Share
- The beta coefficient of BVPS is significant at p < 0.05 and have positive coefficient. The value signifies that there is direct relationship between BVPS and market share prices of public sector and this implies that a unit increase in BVPS will leads to 0.348 increases in market share prices.
- In private sector banks, the coefficient of book value per share is also positive and significant.
Variable | Coefficient | Std. Error | t-statistic | Prob. |
---|---|---|---|---|
Public Sector Banks (Random effect model) | ||||
C | 347.61 | 387.76 | 0.90 | 0.371 |
EPS | 7.480 | 0.86 | 8.66 | 0.000*** |
BVPS | 0.348 | 0.17 | 2.03 | 0.043** |
ROE | 13.16 | 6.62 | 1.99 | 0.048** |
ATR | −183.99 | 311 | −0.59 | 0.555 |
CR | 697.80 | 875.64 | −0.80 | 0.426 |
NIM | −16.81 | 64.20 | −0.26 | 0.794 |
CAR | −25.98 | 25.12 | −1.03 | 0.302 |
NPA | −150.95 | 42.23 | −3.57 | 0.000*** |
CASA | 9.88 | 6.45 | 1.53 | 0.127 |
Note: ***Significant at p < 0.01; **Significant at p < 0.05; *Significant at p < 0.10 | ||||
Private Sector Banks (Fixed effect model) | ||||
C | −119.20 | 220.10 | −0.54 | 0.59 |
EPS | 4.083 | 2.356 | 1.73 | 0.08* |
BVPS | 1.340 | 0.496 | 2.700 | 0.01* |
ROE | −0.372 | 2.77 | −0.13 | 0.89 |
ATR | 2476.128 | 1340.91 | 1.84 | 0.07* |
CR | 2286.175 | 1272.25 | 1.80 | 0.07* |
NIM | 80.24 | 51.28 | 1.56 | 0.12 |
CAR | −7.55 | 9.72 | −0.78 | 0.44 |
NPA | −3.28 | 14.71 | −0.22 | 0.82 |
CASA | 3.00 | 4.05 | 0.74 | 0.46 |
Note: *Significant at p < 0.10. |
Public Sector Banks | Private Sector Banks | |
---|---|---|
R2 | 0.866 | 0.787 |
Adj. R2 | 0.860 | 0.747 |
F-Value | 157.60 | 19.62 |
Significance | 0.000 | 0.000 |
Hausman Test | 16.0910 (0.065) | 38.7180 (0.000) *** |
These results are consistent with the findings of [
3) Return on Equity
The coefficient of ROE in our study is positive but significant at 10% in public sector banks, which indicates that there is positive and significant relationship between ROE and market share prices. The findings are consistent with the results of previous research [
For private sector banks, the regression coefficient of ROE has been positive and statistically not significant, which indicates that ROE is not statistically significant in explain market share price. The reason for the insignificance of return on equity could be that, perhaps most of investors depend on BVPS and other accounting variables used in this study rather ROE. These results are consistent with the findings of [
4) Assets Turnover Ratio
Assets turnover ratio is insignificant in case of public sector banks. Our results are consistent with the findings of with [
For private sector banks, regression coefficient of ATR is positive at significance of p < 0.10 level, this indicates that ATR is highly significant at 10% level in explaining market share price.
5) Current Ratio
For public sector banks, CR reported as insignificant variable, the results are consistent with the findings of [
In the study conducted by [
6) Net Interest Margin
Net interest margin reported as insignificant which indicates that the NIM is not relevant factor in deciding market share price of private and public sector banks.
7) Capital Adequacy Ratio
The beta coefficient of capital adequacy ratio is insignificant and depicts a negative association with market share prices of private and public sector banks.
8) Net Non-Performing Assets Ratio
- For public sector banks, the coefficient of NPA is negative at a significant of p < 0.05 level. This indicates that at 5% level of significance NPA is relevant in influencing market share price.
- Net non-performing assets ratio in this study found as insignificant variable in private sector banks. This implies that NPA are not relevant in deciding market share prices.
9) CASA Ratio
CASA reported as insignificant variable in public and private sector banks.
Further, the estimated regression results also shows that for public sector banks, the value of adj.R2 is 0.866 and indicates that accounting numbers explain about 86.6% of the variations in market share prices and this is greater than the adj.R2 of 0.787 found in private sector banks. Given the respective value of adj.R2 reported under both sectors, it is posit to note that the value relevance of accounting information in the public sector banks is more relevant than that of the 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 listed under BSE 500.
This study compared value relevance of accounting information on the market share price of Indian banks listed in BSE. In particular, it attempts to identify relevant accounting information in influencing market share price and see whether there is significance difference in the value relevance of accounting information between private and public sector banks. The study uses panel data regression methodology (FEM and REM) in testing the relationship accounting information and market share price of listed Indian banks for a period of 10 years.
The empirical results from the regression output provide evidence that EPS, BVPS, ROE and Net NPA ratio significantly influence market share price of public sector banks while ATR, CR, NIM CAR and CASA were reported as insignificant variables in influencing market share price. Out of four accounting variable reported as significant variables in influencing market share price in public sector banks, EPS, BVPS and ROE positively and significantly influence market share price and Net NPA ratios negatively influence market share price; the rest of accounting variables are not significant.
In private sector banks, EPS, BVPS, ATR and CR were reported as significant variables in influencing market share price and all these variables have positive association with stock prices. Other accounting variables like ROE, NIM, CAR, NetNPA and CASA in this study were found as insignificant variables in influencing market share price of private sector banks. Given the respective value of adj.R2 reported under both sectors in
Variable | Public Sector Banks (REM) | Private Sector Banks (FEM) |
---|---|---|
EPS | Significant and Positive at 1% | Significant and Positive at 10% |
BVPS | Significant and Positive at 5% | Significant and Positive at 10% |
ROE | Significant and Positive at 10% | Not Significant |
ATR | Not Significant | Significant and Positive at 10% |
CR | Not Significant | Significant and Positive at 10% |
NIM | Not Significant | Not Significant |
CAR | Not Significant | Not Significant |
NPA | Significant and Negative at 1% | Not Significant |
CASA | Not Significant | Not Significant |
Empirical findings of this study have important implication to Indian investors under banking sector and other users of financial statements and also subjected to several limitations. First, the study compared only value relevance of few selected accounting information from the balance sheet and income statement. Future researchers may add more variables relevant to banking sectors.
Second, the conclusions are based on the analysis of banking sector for the period 10 years from 2005-2014 for better generalization of results; the period covered can be extended to 15 years and other sectors like Oil and Gas, Manufacturing sectors, Service sectors and other non-financial sector should be considered.
Lastly, it will be more important and interesting to see more empirical comparative studies on the value relevance of accounting information between countries like in the study of [
The authors declare no conflicts of interest regarding the publication of this paper.
Bhatia, M. and Mulenga, M.J. (2019) Do Accounting Numbers Have Any Relation with Stock Prices? A Case of Public and Private Sector Banks of India. Theoretical Economics Letters, 9, 1682-1698. https://doi.org/10.4236/tel.2019.95107