Value relevance of earnings and book value of equity in profit versus loss reporting firms: significance of intangible intensity

Abstract

Purpose This study aims to investigate how the intangible intensive nature of firms affects the value relevance of earnings and the book value of equity between profit- and loss-reporting firms. The study also examines how firms’ intangible intensity affects the value relevance of R&D outlays between profit- and loss-reporting firms. Design/methodology/approach An empirical analysis based on Ohlson’s (1995) framework is used. A total of 54,421 firm-year observations of Indian listed firms from financial years 1992–2016 constitute the study sample. Findings The findings suggest that the difference in the value relevance of earnings and the book value of equity between profit- and loss-reporting firms is more significant in non-intangible intensive firms than in intangible firms. Specifically, earnings are more value relevant in profit-reporting and non-intangible intensive firms, whereas book value of equity is more value relevant in loss-reporting and intangible intensive firms. The results also suggest that the difference in the incremental value relevance of R&D information between profit- and loss-making firms is higher in intangible intensive firms than in non-intangible intensive firms. Practical implications The findings of this study can help managers, standard-setters and investors make effective decisions. Originality/value This study offers insights into the impact of intangible intensity on the value relevance of aggregated and disaggregated accounting information between profit- and loss-making firms in institutional settings where capitalization of R&D expenditures is allowed.