Research Onvalue Relevance Of Financial Statements Under Dual Disclosure System

From 1940 when the SEC requires listed companies to prepare and disclose consolidated financial statements, the consolidated financial statements had been subject to wide attention in the theory and practical field. With the emergence of a wave of mergers and acquisitions and increased enterprise entities, consolidated financial statements have gained more and more attention as a tool that reflects the financial situation of the whole enterprise group. In 1995, China standardized the preparation of consolidated financial statements for the first time and then perfects them in terms of consolidated ideas in the new Accounting Principals in 2007.As a media delivering companies’ financial condition, results of operations and cash flow, the disclosure of financial statements has a vital role in the healthy improvement of capital market. Investors in the market need to gather a lot of information before making investment decisions, and information provided by the financial statements is a vital part of the information pool. The supporting role of financial information to investor decision-making is the issue of value relevance. In this study, we define value relevance as the relevance between financial information from financial statements and share prices. If the stock price can be explained to a large extent the financial statements price movements, it shows a high value correlation.SEC has required that listed companies must disclose both consolidated statements and parent statements during the annual financial report, which is the implementation of the dual disclosure system. Thus there is a problem, whether investors in China should choose consolidated data or parent report data when making an investment decision? Which has more value relevance? In previous studies, most scholars focus on aspects of the preparation of the consolidated financial statements in terms of philosophy and methods, but the report for the parent company got little concern. And among these articles studying this issue, most of them do not differentiate between industries. However, different industries have distinctive behaviors in terms of industry competition, capital structure because of their different life cycle and sensitivity to macroeconomic. All these differences will affect the fluctuations in stock prices, thus affecting the value relevance of the financial statements. What differences is there between industries? In addition, what support investors to make investment decisions is a large collection of information, and financial information is only part of the information pool. Any change of other factors in information pool could affect the value relevance between financial statements and the stock price. Capital market is constantly changing, disclosure of financial reports is constantly improving to adapt to changes in the environment. So, how did the value relevance of financial statements change over time?Based on the above variety of puzzles, I try to answer all of these doubts through theoretical and empirical research method. In empirical part, I select A-share listed companies from SSE and SZSE from 2010 to 2014 as samples and then test the correlation between share prices and financial data using pricing model. This article is intended to solve three problems:(1)Is the value relevance of consolidated statements better than that of parent statements? (2)Are there differences between industries in terms of relevance of financial statements?(3)How the value relevance did change over time? In order to solve the three major issues, the paper is divided into five parts:part one describes the background, significance and the summary of studies by previous literature scholar. The second and third part is the theoretical analysis of this paper section:first, the definition of value relevance of accounting information; second, differences in accounting information and value relevance between two financial statements; third, the necessity of industry classification. The fourth and fifth part is the core empirical test of this paper. The price model is used to regress sample data to test the correlation between share prices and financial data from two respective financial statements by comparing R2. In addition, empirical results are combined to test the differences between industries. And the trend of value relevance of financial statements was captured by the change of R2 from 2010 to 2014.And last we present the limitations of this study as well as prospects for future related studies.This paper verifies there are differences between industries in terms of financial statements’ value relevance, thus testing the necessity of industry classification.; real estate industry report worth more relevant parent company, while the value of other sectors of the consolidated financial statements more relevant; With changes in capital market development, value relevance of the report is gradually declining. Articles expect to reference the financial statements provide a theoretical basis and provide a reference for future research directions by these findings for investors. According to empirical results, parent financial statements’ value relevance is better than consolidated statements in real estate industry; However in other industries, consolidate statements better. And value relevance of financial statements is beginning to decline over time. This report is intended to provide theoretical evidence for decision making in aspect of financial statements and also provide reference to the future potential studies.