Koffee Hut

Garima's Blog

‘Value Relevance’ -A Brief Overview

leave a comment »

The objective of valuation research is to relate accounting numbers to a measure of firm value to assess the characteristics of accounting numbers and their relation to value of the firm. (Barth, 2000).

The valuation research  which aims at investigating the empirical relation between stock market values (or changes in values) and particular accounting numbers for the purpose of assessing an accounting standard are broadly categorized as the ‘‘value-relevance’’ literature (Holthausen and Watts, 2001).

Francis et al (2004) specify value relevance as one of the most important attributes of accounting quality. They argue that value relevance is a more important attribute of accounting quality than conservatism or timeliness.

A primary focus of the FASB and other standard setters is equity investment. Although financial statements have a variety of applications beyond equity investment, e.g., management compensation and debt contracts, the possible contracting uses of financial statements in no way diminishes the importance of value relevance research, which focuses on equity investment.

Investors represent a large class of financial statement users and thus most of the academic research addressing financial reporting issues especially relevant to practicing accountants, particularly standard setters, adopts an investor perspective.Since investors are primarily interested in information that will help them assess the value of the firm, valuation models are generally used to address the questions of value relevance. Further valuation theory also provides a vast academic literature to give a firm base to the research in this context (Barth, 2000).

Financial statements consist of balance sheet and income statement. The balance sheet and the income statement have divergent roles. The fundamental role of the income statement is for equity valuation, whereas a distinctive role of the balance sheet is to facilitate loan decisions and monitoring of debt contracts. The income statement fulfills its role by providing information about rents associated with the firms future growth opportunities and other unrecognized net assets. The balance sheet fulfills its role by providing information on liquidation values assuming book values approximate liquidation values (Watts ,1974).

Various academicians (Ou and Penman 1989; 1996; Harris and Ohlson 1990; Francis and Schipper, 1999; Barth 2000; Barth, Beaver and Landsman 2001; Holthausen and Watts, 2001) have given their interpretation (Appendix A) of the term value relevance. However the key commonality in all the definitions remains that an accounting amount is deemed to be value relevant if it has a significant association with equity market value.

The most comprehensive definition of value relevance is given by Barth, Beaver and Landsman (2001),  value relevance is as an empirical operationalization of the criteria of relevance and reliability of accounting numbers as reflected in the equity value. This definition of value relevance conforms to the statement of the importance of value relevance of accounting information in the Framework for the Preparation and Presentation of Financial Statements (IASC, 1989). According to IASC, relevant information is such that “… influences the economic decisions of users by helping them evaluate past, present and future events”. From the investors´ perspective, relevant information is information which contributes to their equity investments decisions.

Value Relevance and Intangible Assets

The valuation of tangible and intangible assets falls under two perspective signaling and measurement. Signaling perspective is concerned with the change in the value of the firm measured by stock price to the announcement of the change in accounting number. Whereas the measurement perspective is broadly concerned with the characteristic of accounting number measured by its association with the stock price. The result of decline of value relevance has been mixed. Traditionally value relevance has been largely tested in the USA however since last decade (1994) there has been an increase in the studies in other parts of the world as well such china, Japan, Kuwait etc. The results vary from country to country, research suggest that macro economic factors such as market oriented financial system, use of auditors and tax structure are the common factors that are attributed for the difference in the results.

The research under value relevance is subject to major criticism .The criticism largely is dependent of the fact that the whole value relevance literature rests on the simple premise that the accounting standard is preferred if it has a significant association with the market value. Further the research in value relevance assumes that the investors are only users of financial statements.

Despite the criticism , value relevance research is quite beneficial as it at least gives some indication about the relevant  information  valued by the investors.Also Value relevance studies are gaining importance  in light of increased investment in intangible assets which are not effectively reported by the financial reports.


Barth, M.E., (2000), “Valuation-based research implications for financial reporting and opportunities for future research”, Accounting and Finance, 40, 7–31.

Barth, Mary E., Beaver, William H., Hand, John R.M. and Landsman, Wayne R. (1998a), “Relative valuation roles of equity book value and net income as a function of financial health”, Journal of Accounting and Economics, 25, 1–34.

Francis,J etal (2004),”Cost of equity and earning attributes”, The Accounting Review 79(4),967-1010.

Francis, J. and K. Schipper (1999), “Have Financial Statements Lost Their Relevance?” Journal of Accounting Research, 37, 319—352.

Harris,X and J.Ohlson (1990), “Accounting Disclosures and the Market’s Valuation of Oil and Gas Properties: Evaluation of Market Efficiency and Functional Fixation,” The Accounting Review, 764-8

Holthausen,R.W., and Watts,R.L., (2001), “The relevance of the value relevance literature for financial accounting standard setting”, Journal of Accounting and Economics, 31.

Ou, J., And S. Penman (1989) “Accounting Measurement, Price-Earnings Ratio, and the Information Content of Security Prices”, Journal of Accounting Research, 111—52.


Written by Dr. Garima Kapoor

October 13, 2010 at 2:38 pm

Ethnography : Introduction and Analysis

with 2 comments

Ethnography refers to the form of social research having substantial number of following features :

1)Strong emphasis on exploring the nature of particular social phenomena rather than setting out to test hypothesis about them.

2)A tendency to work primarily with “unstructured data, that is, data that have not been coded at the point of data collection in terms of a closed set of analytic categories.

3)Investigation of a small number of cases, perhaps just one case, in detail.

4)Analysis of data that involves explicit interpretation of the meanings and functions of human actions, the product of which mainly takes the form of verb descriptions ad explanations , with quantification and statistical analysis playing a subordinate role.

Tools and Techniques for Analysis in Ethnographic Research :

First and foremost, analysis is a test of the ethnographers ability to think- to process information meaningfully and usefully.

The initial stage of analysis involves simple perception . Even perception however , is selective. The ethnographer selects and isolates pieces of information from all the data in the field.

A focus on relevant and manageable topic is essential and leads to refinement in the study. However the researcher must probe in all those topics by comparing and contrasting data, trying to fit it into a bigger puzzle.


  1. Triangulation is at the part of ethnographic validity. It is testing one source of information against another to strip    away alternative explanations and prove a hypothesis.
  2. Triangulation works in all the settings , with any topic and on any level. The trick however lies in comparing comparable items and levels during analysis.
  3. Triangulation always improves the quality of data and accuracy of the ethnographic findings.
  4. In many a cases , both serendipitous and systematic triangulation are invaluable in providing a reality test and base line understanding.


Ethnographers look for patterns of thought and behavior. Patterns are form of ethnographic reliability. They see patterns of thought and action in various situations and with various participants.

The Ethnographer begins with mass of unidentifiable ideas and behavior and then collects pieces of information, comparing, contrasting and sorting gross categories until a discernible thought or behavior becomes identifiable

Next the ethnographer must listen, observe and then compare his or her observations with model.

Exception that emerge out help to circumscribe the activity and clarify its meaning.

The process requires further shifting and sorting to match between categories.

The theme or ritualistic activity finally emerges and consists of collection of such matches between model and observed reality.

As soon as the ethnographer finishes analyzing and identifying one pattern another pattern emerges for analysis. The fieldworker can then compare the two patterns.

In practice , the ethnographer works simultaneously n many patterns. The level of understanding increases geometrically as researcher moves up the conceptual ladder –mixing and matching patterns and building theory form the ground up.

Key Events:

The fieldworker can analyze the key or focal events. Key events come in all shapes and sizes. Some tell more about culture than others but all provide a focus of analysis.

These key events contain great amount of information within them. They might provide tremendous amount of information on embedded activity.

A rudimentary knowledge of social situation will enable the ethnographer to infer a great deal from key events.

In many a cases an event is a metaphor for a way of life or specific social value. Key events provide a lens through which to view a culture.

Other Tools:

Maps: Maps can help the ethnographer in charting his course though community. Drawing of maps crystallizes images, networks and understandings and suggest new paths to explore.

Flowcharts: These are useful in studies of production line operations. The analytic process of mapping the flow of activity and information serves as a vehicle to initiate additional discussions.

Organizational Charts: drawing of charts test the ethnographers knowledge about the system. Both formal and informal org hierarchies can be charted for comparison.

Further chart can measure changes as people move in and out up and down in hierarchy. These charts help in clarifying the structure and function of any intuitionist form of human organization.


Matrices provide a simple, systematic , graphic way to compare and contrast data. Matrices help the researcher to identify emerging patterns in the data.

The researcher can compare and cross –reference categories of information to establish a picture of a range of behaviors or thought categories.


Ethnographers often collect data that are in form of frequencies.

Anthropologists usually work with nominal and ordinal scales. Nominal scales consist of discrete categories such as sex and religion. Ordinal scales provide discrete categories as well as a range of variation between categories.

Written by Dr. Garima Kapoor

February 25, 2010 at 5:59 pm


leave a comment »

This article reviews both the economic concept of net income and the accounting procedure of specific business situation and then suggest a principle which is compatible with the economic theory and at the same time coordinates most current accounting practices.

When should Profit be Recognized???

Buying   →     Selling  → Collecting

At point of time or it should be spread over cycle.

Profit is a result of making the most critical decision or the performance of the most difficult task in the cycle. E.g. inventory to accounts receivable.

The following section will analyze different business, what practices are being followed and the test of the applicability of critical foundation theory in business.


Steps involved in doing this business.

1.Wise buying.
2.Effective selling.
3.Efficient collecting.

Practice: Recognize revenue at the time of selling.

Critical principle approach: selling is the critical activity for most of the merchandisers and the profit is recognized at that time.


Additional step of Purchased raw materials to saleable units.

Extra point of recognition is stated. i.e. stage of value addition.

Cases: Uncertainty of the sale price, recognition at the sale of products. Active markets such as precious metals or agro products., profit recognized at the time of manufacture. Contract manufacturing  Main principle working is that of certainty alternative paradigm of critical event also is pertinent.


Practice: recognition in the period when magazines are distributed.

Certainty theory breaks down, the recognition should be at the time when subscription is sold.

Critical theory, editorial is the critical activity undertaken hence the practice.


Critical theory is all pervasive and closely matches the current  practices of the business. It also enable good insight into the business. Theory has it’s ground in the fundamental economic theory. Rather than suiting the practice to the needs of different business.

Reference: John H.Myers, “Accounting review”

Written by Dr. Garima Kapoor

February 24, 2010 at 12:10 am

Extraordinary Gains and losses, Their Significance to the Financial Analyst

leave a comment »

Accounting Principles Board Opinion No. 9 “Reporting the Results of Operations”. This Opinion did bring about an improvement of practice by requiring the inclusion of all extraordinary gains and losses in the determination of net income. Nevertheless it has, since its inception, labored under a fatal flaw: it is based on some very vague and erroneous concepts of what the real significance of extraordinary items is to the intelligent user of financial statements.
The net result has been that, rather than being helpful to the interpretation of the income statement, the presentation of extraordinary gains and losses, has, in general, contributed to confusion and in many cases to inferences that have been downright misleading.

This article is devoted to an examination of this most important and most neglected aspect of the problem.

Why do We Identify Extraordinary Gains and Losses:

Both the evaluation of current earnings levels and the projection of future earnings rely importantly on the separation of the stable elements of income and expense from those which are random, non-recurring and erratic in nature.

Stability and regularity are important dimensions of the quality of earnings on which the forecaster relies in making his earnings projections. Thus, in order to separate the relatively stable elements of income and expense from the random or erratic elements it is important, as a first step, to identify those gains and losses that are nonrecurring and unusual as well as those which are truly extraordinary.

Significance of Accounting Treatment and Presentation :

The accounting for, and the presentation of, extraordinary gains and losses has always been subject to controversy. One of the basic reasons for the controversy is reporting management’s great interest in the manner in which periodic results are reported. This concern is reinforced by a widespread belief that most investors and traders accept the reported net income figures, together with the modifying explanations that accompany them, as true indices of performance.

Extraordinary gains and losses often become the means by which managements attempt to modify the reported operating results. Quite often the accompanying explanations are slanted in a way designed to achieve the impact and impression desired by management.

Analysis and Evaluation:

The basic objectives in the evaluation of extraordinary items by the analyst are:

1.To determine whether a particular item is to be considered “extraordinary” for purposes of analysis; that is, whether it is so unusual that it requires special adjustment in the evaluation of current earnings levels and of future earning possibilities.

2.  To decide what form the adjustment for items considered “extraordinary” should take. Determining Whether an Item of Gain or Loss Is Extraordinary :

Common classification of items

1.Non-recurring Operating Gains and Losses.

2.Recurring Non-operating Gains or Losses.
3.Non-recurring, Non-operating Gains or Losses.

Non-recurring Operating Gains and Losses:

By “operating” we usually identify items connected with the normal and usual operations of the business.

The concept of recurrence is one of frequency. There are no predetermined generally accepted boundaries dividing the recurring event from the non-recurring. An event occurring once a year can be definitely classified as “recurring”. An event, the occurrence of which is unpredictable and which in the past has either not occurred or occurred very infrequently, may be classified as non-recurring.

Non-recurring operating gains or losses are, then, gains or losses connected with or related to operations that recur infrequently or unpredictably. e.g.  foreign operations give rise to exchange adjustments because of currency fluctuations or devaluations.

Depending on the type of business and other factors, a degree of variability and abnormality must be expected.

In considering how to treat non-recurring, operating gains and losses the analyst would do best to recognize the fact of inherent abnormality and the lack of a recurring annual pattern in business and treat them as belonging to the results of the period in which they are reported.

Objectives of a business has undergone considerable revision in modem financial theory, which considers the main objective of management to be increasing the capital of the owners, or enhancing the value of the common stock rather than “baking bread” or any other specific objective.

The analyst should not be bound by the accountant’s concept of “normal operations”, hence he can usefully treat a much wider range of gains and losses as being derived from “operations”— reinforcing our conclusion that he should consider most non-recurring, operating gains and losses as part of the operating results of the year in which they occur.

Some items require separation from the results of a single year. The relative size of an item could conceivably be a factor requiring such treatment. In this case the best approach is to emphasize average earnings experience over, say, five years rather than the result of a single year. This approach of emphasizing average earnings becomes almost imperative in the case of enterprises that have widely fluctuating amounts of non-recurring and other extraordinary items included in their results.

Recurring Non-operating Gains or Losses:

This category includes items of a non-operating nature that recur with some frequency. Examples interest income and the rental received from employees who rent company owned houses.

While items in this category are classified as “extraordinary” in published financial statements, the narrow definition of “non-operating” which they involve, as well as their recurrent nature, are good reasons why they should not be excluded from current results by the analyst. They are, after all, mostly the result of the conscious employment of capital by the enterprise and their recurrence requires inclusion of these gains or losses in estimates designed to project future results.

Non-recurring, Non-operating Gains or Losses:

Not only are the events here non-repetitive and unpredictable, but they do not fall within the sphere of normal operations. In most cases these events are extraneous, unintended and unplanned. Business is ever subject to random shocks, be they natural or man-made, including for example: substantial uninsured casualty losses, such as those arising from fires, storms, floods, etc.

Of the three categories this one comes closest to meeting the criterion of being “extraordinary”. Nevertheless, truly unique events are very rare. What at the time seems unique may, in the light of experience, turn out to be the symptom of a new set of circumstances that may continue to affect earning power.

Effect of Extraordinary Items on Resources:

Every extraordinary gain or loss has a dual aspect. When it records a gain (whether extraordinary or not) a business also records an increase in resources. Similarly, when a business records a loss it also records a reduction of resources.

Since return on investment relates net income to resources, incurring extraordinary gains and losses will affect this important measure of profitability.. In other words, if earnings and events are to be used to make forecasts, then extraordinary items have implications beyond past performance. If an extraordinary loss results in the destruction of capital on which a certain return is expected, for example, that return may be lost to the future. Conversely, an extraordinary gain will result in an addition to resources on which a future return may be expected.

This means that in projecting profitability and return on investment, the analyst must take into account the effect of recorded extraordinary items as well as the likelihood of the occurrence of future events that may result in extraordinary items.

Implications for Accounting Profession:

The present practice in this area is not useful to the professional analyst and may be downright misleading to others. It is useful in helping certain managements to divert attention from their mistakes, their failures and from the risks which are inherent in their operations.

It is high time for the accounting profession to abandon the notion that it can pre-analyze and interpret the income statement for the reader by means of the loose principles of identification of extraordinary items existing today. Even assuming that such built-in interpretation is desirable, it would require a major research effort by the accounting profession in conjunction with the informed users of financial statements.

*The above article is a summary of paper Extraordinary Gains and losses, Their Significance to the Financial Analyst          by Leopold A. Bernstein, FINANCIAL ANALYSTS JOURNAL / NOVEMBER – DECEMBER 1972*

Written by Dr. Garima Kapoor

February 23, 2010 at 11:55 pm

Accounting for Goodwill : A Realistic Approach

with 6 comments

by Tearney M.G.   Journal of Accountancy.

Goodwill accounting is one area where outdated techniques still exist with the blessing of the Accounting Principles Board. With the exception of amortization,’ valuing and reporting goodwill arising in business combination has remained basically unchanged since 1944, and yet one of the primary social responsibilities of any discipline should be to discard old methods and techniques in favor of expanding parameters of work in order to benefit society.

This article will attempt to show that the existence and acquisition of goodwill is predicated on some identifiable condition or conditions present within the acquired entity and that failure to recognize these intangibles is a dereliction of duty by the accounting profession.

Conditions favorable for goodwill

Goodwill acquired in business combination represents a payment made by one entity to acquire another’s profitability.

There are many reasons why one corporation might wish to purchase another. Those most often cited by authors* writing on the subject include the following:

  • Accomplishing a particular market objective.
  • Saving time in expanding into a new area.
  • Acquiring management and technical skills.
  • Achieving product diversification.
  • Achieving integration.

“. . when one entity acquires another and willingly incurs a cost greater than the fair market value of the other’s net identifiable assets, the latter company possesses some characteristics important to the acquiring company.”

It is apparent from the above that, when one entity acquires another and willingly incurs a cost greater than the fair market value of the other’s  net identifiable assets, the latter company possesses some characteristics important to the acquiring company. These are usually of an intangible nature, g., personnel skills, distribution channels, product diversification.

Intangibles of this type are frequently the primary motivating factor in the acquisition decision, yet consolidated financial statements not only fail to disclose these assets but also lump them together as one asset called “goodwill.”

Failure of Financial statements:

Historically, goodwill has become known as the excess profitability of an entity above that considered normal in the circumstances.

The cost of goodwill, as specified by generally accepted accounting principles, is the difference between (1) the total cost paid to acquire another entity and (2) the fair market value of assets acquired (usually only those reflected on the acquired company’s balance sheet). Thus, goodwill is valued indirectly by assigning it the unallocated portion of the purchase price.

The term “goodwill” then represents all of the assets acquired but not specifically identified, regardless of whether or not the purchased company has excess profits.

Goodwill has consequently become a misleading and uninformative term which means different things on different financial statements.

A reason often stated for non-recognition of assets acquired in business combinations, such as human resources, marketing facilities, geographic areas and so forth, is that their value is too subjective to allow allocation of total cost. Using this argument to justify recognition of goodwill rather than other existing valuable assets is analogous to burying one’s head in the sand to avoid being seen.

Cost assigned to acquired goodwill, in current accounting practice, is as subjectively determined as possible.

There is no attempt made to value goodwill directly; rather, goodwill is determined by the “drop-out” method, i.e., whatever is left must necessarily represent goodwill cost. This procedure results in financial statements which fail to disclose any of the underlying assets that prompted the acquisition decision.


A less subjective method that certainly would result in more informative financial statements would be to identify and value these underlying assets. For example, if a particular entity was acquired in order to provide access to previously unavailable geographic areas, this asset, “geographic area,” could be readily identified.

Its value could be determined by experts in the field, e.g., independent appraisers, based on such criteria as estimated cost to develop the new market and/or increase in income due to earlier penetration of the area. The asset “geographic area” could justifiably be amortized over the estimated time saved by acquisition as opposed to internal growth.

Identify Assets Acquired:

Current accounting practices for goodwill, as well as all other tangible and intangible assets acquired in business combinations, need to be updated to allow the preparation of consolidated financial statements that provide users with more information.

Whenever an acquired entity does possess excess profitability (theoretical goodwill), the underlying reasons for this excess could be identified, valued and recorded, rather than ignored and arbitrarily labeled “goodwill.“

Independent appraisers, many of whom specialize in valuing assets acquired in mergers, could be consulted to identify and value “hidden” assets purchased by acquiring an entire going concern. Negotiations leading up to a final settlement between the parties to an acquisition probably offer the best evidence of undisclosed intangibles.”

Prominent assets such as marketing channels and unique personnel skills will likely be mentioned in the minutes of these negotiations.

Mention might also be made of the assumed value of the intangibles; if not, a review of past accounting records should disclose amounts incurred in their development.

The failure of accountants to require identification and valuation of so-called “hidden assets” is not because the task is impossible or impractical, but apparently because of a lack of interest when a generally acceptable and less time-consuming alternative exists—i.e., labeling the entire excess cost “goodwill.”

Current practices in this area not only negate the informative nature of financial statements but also could result in a disservice to clients.


Current accounting practices for goodwill as well as for other valuable assets not appearing on an acquired company’s balance sheet are not in conformity with available valuation techniques. By substituting the catchall account “goodwill” for many assets purchased in business combinations, such as personnel skills and marketing channels, accountants are not only ignoring the existence of expert appraisers but perpetuating a disservice to clients and the general public as well. It is high time that we accountants recognized our social responsibility in this area.

Valuation techniques have been developed to a point where goodwill no longer need appear on financial statements. All assets acquired in business  combinations, regardless how intangible they may be and whether or not they appear on the acquired entity’s balance sheet, should be identified, valued and disclosed, thereby removing one of the thorns in the accountant’s side.

*This is a small write up of the paper by Tearney M.G.  published in Journal of Accountancy.*

Written by Dr. Garima Kapoor

February 23, 2010 at 11:07 pm

Research Designs: Experiments

leave a comment »

Research Designs: Experiments

Once the research objective is defined, the hypotheses explained and the variables are defined, the researcher has to test the hypotheses. There are some fundamental problems that arise while testing the hypotheses:

  • Whom shall we study?
  • What shall we observe?
  • When will observations be made?
  • How will the data be collected?

Research Design is the “Blueprint” that enables the investigator to come up with the solutions to the fundamental problems faced while testing the hypotheses and guides him / her in the various stages of research. In other words it is the program that guides the investigator as he collects, analyzes and interprets the observation.

The Classical Experimental Design: It consists of two comparable groups:

An Experimental Group

Control Group

The assignment of the cases to either of the group is random.

Pretest is taken for all cases prior to the introduction of the independent variable in the experimental group .Post test is taken for all cases after the experimental group has been exposed to independent variable. If the difference in measurements between posttest and pretest is significantly larger than the control group, it is inferred that the independent variable is causally related to the dependent variable

Causal inference: It is an inference about the change an independent variable is expected to produce in the direction and the magnitude of the dependent variable. In practice, the demonstration of causality involves three distinct operations:

  • Demonstrating co-variation
  • Eliminating spurious relations
  • Establishing the time order of the occurrences

Components of a Research Design: The classic research design consists of four components:

  1. Comparison: It is an operation required to demonstrate that two variables are correlated. e.g. If a researcher wants to demonstrate a correlation between cigarette smoking and lung cancer, a researcher might compare the frequency of cancer cases among smokers and non-smokers or alternatively might compare the number of cancer cases in a population of smokers before and after they started smoking.
  2. Manipulation: Manipulation helps a researcher in establishing the time order of events. Here, the major evidence is required to determine the time sequence of events i.e. the independent variable precedes dependent variable. e.g. If a researcher is attempting to prove that the participation in an alcohol treatment group decreases denial of drinking problems, he or she  must demonstrate that a decrease in denial took place after participation in the treatment group. The researcher needs to establish some form of control over the assignment to the treatment group so that he can measure the level of denial drinking problems before and after participation in the group
  3. Control: Control enables the researcher to determine that the observed co variation is non-spurious. Control requires that the researcher rule out other factors as rival explanations of the observed association between the variables under investigation. Such factors could invalidate the inference that the variables are causally related. This issue is termed as ‘internal validity’.

In order to establish the internal validity, a researcher must answer the question of whether changes in the independent variable did infact, cause the dependent variable to change. The following are the factors that may jeopardize the internal validity.

Extrinsic factors

Intrinsic factors

(1) History
(2) Maturation
(3) Experimental mortality
(4) Instrumentation
(5) Testing
(6) Regression artifact
(7) Interactions with selections

Methods to counteract the effect of Existing factors:

Matching: It is the of equating the experimental group and control group on existing factors that are known to be related to the research hypotheses.  Two methods can be used for matching:

Precision Matching: In this method, for each case in an experimental group, another case with identical characteristics is selected for the control group.

Frequency Distribution: In this method, the experimental groups and control groups are made similar for each of the relevant variables separately rather than in combination.

Randomization: Even if it were possible to avoid the effects of all the factors, investigator can never be sure that  all of them have been isolated. Other factors of which the investigator is unaware may lead to erroneous causal interpretations. Researchers avoid this problem by using Randomization, another process whereby cases are assigned to the experimental group and control group.

4. Generalization : Most research is concerned not only with the effect of one variable on another in the particular setting studied but also with its effect in other natural settings and on larger populations. This concern is termed as external validity of research design.

The two main issues of external validity are:

  • Representativeness of the Sample
  • Reactive Arrangements

Conclusion: The classical experimental design is one of the strongest logical models for inferring causal relations. The design allows for pretest, posttest and control group-experimental group comparisons. It permits the manipulation of the independent variable and thus determination of the time sequence. It controls the most sources of internal validity by including randomized group.

The external validity of this design is weak and it does not allow researchers to make generalization.

Two variations of the classical experiment design are stronger in this respect. They are:

  • The Solomon four-group design
  • The posttest- Only control group design

* This is an  excerpt of the notes taken in  Research Methodology class*

Written by Dr. Garima Kapoor

November 21, 2009 at 7:12 am

Environmental Disclosures in Annual Report: A Study in Context of Indian Manufacturing Companies- Dr. Suneel Arora & Dr. Garima Kapoor

leave a comment »

During the last decade, there has been a growing awareness on the disclosure of environmental performance. Over the last few years, many studies have been undertaken which have examined the disclosure of environmental information in Annual Reports but very few studies have been done which analysis the practice followed by Indian companies. Using content analysis, this study examines a sample of 210 listed companies out of 1591, provided by CMIE in the category of manufacturing companies in 2005 and tries to comment upon the practices followed by Indian Companies. Although the requirement to disclose environmental information in annual reports has not kept pace with the legislative reform, there has been a significant increase of these disclosures. It also finds that most of the disclosures are covered in the Director’s Report across industries.


During the last decade, there has been a growing awareness on the disclosure of environmental performance. With this growing awareness of environmental issues internationally, there is also an accelerating trend for organization, especially those have a direct and substantial influence on the environment like manufacturing, power generation, mining etc, to provide information regarding the environment implications of their operations. This incorporation of environmental issues into the corporate annual report can be labeled as Environmental reporting. It includes voluntary and involuntary disclosure of its activities on the environment. Accounting and disclosure of environmental aspects have been emerging as an important dimension of reporting practices. Mastrandonas and Strife (1992) find that stakeholders demand disclosure of company environmental information because of the magnitude of liabilities and cost associated with environmental issues. They say that corporate should consider using environmental annual reposts to communicate with their stakeholder and that will foster their partnership.

In different countries companies have different practices of making environmental reporting in their annual report. In the west, corporate entities are giving due attention to this stakeholder demand for environmental impacts and providing information regarding their operation which affect environment directly or indirectly. There are roughly two approaches of disclosure one is descriptive, that is followed by all enterprises and another is quantitative approach which includes their technical initiative and expenses they done on environment and how they are degrading the environment. Quantitative approach is rarely followed in India but some countries in Western Europe.

In India we do not have any formal guidelines provided by government or industry so in absence of this, enterprises design their own mechanism and follow certain practices for disclosure. This study aims to examine and try to comment upon the environmental disclosure practices followed by Indian Companies manufacturing. It categorize into five categories in form of five steps towards environmental disclosure and reporting.

Literature Review

Over the last few years, many studies have been undertaken which have examined the disclosure of environmental information in Annual Reports but very few studies have been done which analysis the practice followed by Indian companies.

Traditionally, environmental disclosure constitutes part of as corporate social responsibility which means corporations should be held accountable for any of its actions that affect people, communities and the environment. One of the earliest studies on social responsibility disclosure is Beresford and Feldman (1976). They report that the Fortune 500 Companies making social responsibility disclosures in annual reports increased by 10 percent from 1974 to 1975. McGuire et al. (1988) say that CSR activities may improve a firm’s reputation and relationships with bankers, investors, and government officials and this improved relationship may well be translated into economic benefits. According to Spicer (1978), a firm’s CSR behaviour could be a factor that influences banks and other institutional investors’ investment decision. Thus, a high CSR profile may improve a firm’s access to sources of capital. Another important study was by Guthrie and Parker (1991) in which they analyze the corporate and social disclosure practice in the US, the UK, and Australia in 1983. They review disclosures relating to the environment, energy, human resources, products, community involvement, and other.

In an survey based on 1997-98 annual reports of Indian companies, done by Business Today (1998), commented in reference to disclosure of environmental, energy and social issues “still limited to little more than a sentence or two each on today’s annual reports- although companies like Gujarat Ambuja, Dr Reddy’s Lab and Balrampur Chini Mills are exceptions- disclosing the corporation’s track-record on the environment, energy, and community management will become increasingly important as the stakeholders’ perception of the total ambit of corporate responsibility changes.

The existing research and evidences show that investors do care for environmental disclosure in public reports. The review of disclosure of environmental information in the annual report of Indian companies is still lacking. To the best of our knowledge, no studies have examined the content analysis of annual reports and this study aims to fill this gap.


CMIE provides us the four main types of industry in India i.e. electricity, services, mining and manufacturing.  It has categorized 1591 companies in manufacturing as on Oct. 8th 2005 and out of this a sample of 210 companies is taken in alphabetical order from ‘aa’ to ‘birla E’ inclusive of all short names starting with the alphabet ‘b’. The sampling technique applied is Quota sampling which is a type of non-random sampling. The data is taken from the current year i.e. 2005 annual reports where 2005 annual is not available it is taken from 2004 (16 companies) and even older also (6 companies). Sources of database are given in the end.


Using content analysis, this study examines the current practices followed by Indian manufacturing companies in disclosing environmental aspects in their Annual Reports. The information given in the annual report regarding environmental degradation, pollution, ecology, green technology etc. is categorized in five steps

Step zero –      no information

Step one –       short note / their future plans / annexure to director’s report

Step two –       in director’s report / formal policy statement / corporate governance

Step three –     technological initiative for environmental benefit or for pollution control

Step four –      mention in their vision / welcoming note / triple bottom line approach[1]


The evidence indicates that companies do respond to the increased demand of environmental disclosure. Out of 210, 106 companies (50 %) have stated something about their environmental aspects and shown some concern and rest 104 companies do not state even a sentence regarding their environmental concern. These 104 companies are in ‘step zero’ as they did not show any move towards environmental disclosure. Now the next point to analyze is how much information they are providing to their investors group. As we have state in methodology part that we divide companies disclosure in four categories. Out of 106 companies, which disclose some information regarding environment, 60 companies are in step 1, 24 are in step 2, 12 are in step 3 and 10 are in step 4. List of companies in step 3 and 4 is given in annexure.


Regarding environmental assets, liabilities or contingencies, in India currently there are very limited requirements for any formal identification or reporting. Its reporting is an early stage of evolution and being groomed under the voluntary leadership of some enterprises. Although the requirement to disclose environmental information in annual reports has not kept pace with the legislative reform, there has been a significant increase of these disclosures when we compare our results with pervious finding. It also finds that most of the disclosures are covered in the Director’s Report across industries. There is an urgent need to tighten the reporting rules relating to disclosure of environmental contingencies.

Sources of data

Annual reports were downloaded from ISI Emerging Markets database http://site.securtities.com and Asian CERC’s – Insight http://www.insight.asiancerc.com.

News articles downloaded from Informatics – IBID http://www.ibid.informindia.co.in.


Mastrandonas, Andrew, and Strife, Polly T., (1992), Corporate Environmental Communications: Lessons form Investors, Columbia Journal of World Business, Fall /Winter 1992, Vol. 27, Issue 3/4, p234-240.

Beresford, D.R., and S.A. Feldman, (1976) Companies increase social-responsibility disclosure, Management Accounting, Vol 57, No. 9, pp. 51.

Guthrie, J. and L. Parker, (1991), Corporate social disclosure practice: A comparative international analysis, Advances in Public Interest Accounting, 159-76.

McGuire, J., A. Sundgreen, and T. Schneeweis, (1988) Corporate social responsibility and firm financial performance, Academy of Management Journal, Vol 31, No. 4, pp. 854-872.

Spicer, B. (1978) Investors, corporate social performance and information disclosure: an empirical study, Accounting Review, Vol. 53, pp. 94-111.

Business today, The New Annual Report – BT: Cover Story, October 7-21, 1998 pp 74.

[1] linking of environmental, economic and social aspects of corporate performance


Written by Dr. Garima Kapoor

November 20, 2009 at 12:04 pm