The Role of Book Value in Equity Valuation: Does the Stock Variable Merely Proxy for Relevant Past Flows?

1998 ◽  
Author(s):  
K.R. Subramanyam ◽  
Mohan Venkatachalam
Keyword(s):  
Equity Valuation ◽  
Book Value

Equity Valuation and Negative Earnings: The Role of Book Value of Equity

1999 ◽  
Vol 74 (1) ◽  
pp. 29-61 ◽  
Author(s):  
Daniel W. Collins ◽  
Morton Pincus ◽  
Hong Xie
Keyword(s):  
Equity Valuation ◽  
Negative Coefficient ◽  
Cross Sectional ◽  
Book Value ◽  
Negative Relation ◽  
A Value ◽  
Loss Firms ◽  
Negative Earnings

This study provides an explanation for the anomalous significantly negative price-earnings relation using the simple earnings capitalization model for firms that report losses. We hypothesize and find that including book value of equity in the valuation specification eliminates the negative relation. This suggests that the simple earnings capitalization model is misspecified and the negative coefficient on earnings for loss firms is a manifestation of that misspecification. Furthermore, we provide evidence on three competing explanations for the role that book value of equity plays in valuing loss firms. Specifically, we investigate whether the importance of book value in cross-sectional valuation models stems from its role as (1) a control for scale differences (Barth and Kallapur 1996), (2) a proxy for expected future normal earnings (Ohlson 1995; Penman 1992), or (3) a proxy for loss firms' abandonment option (Berger et al. 1996; Barth et al. 1996; Burgstahler and Dichev 1997). Our results do not support the conjecture that the importance of book value in cross-sectional valuation stems primarily from its role as a control for scale differences. Rather, the results are consistent with book value serving as a value-relevant proxy for expected future normal earnings for loss firms in general, and as a proxy for abandonment option for loss firms most likely to cease operations and liquidate.

Combining Earnings and Book Value in Equity Valuation

1998 ◽  
Vol 15 (3) ◽  
pp. 291-324 ◽  
Author(s):  
STEPHEN H. PENMAN
Keyword(s):  
Equity Valuation ◽  
Book Value

An Examination of the Effect of IT Investments on Firm Value: The Case of Y2K-Compliance Costs

2000 ◽  
Vol 14 (2) ◽  
pp. 95-108 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Ram S. Sriram
Keyword(s):  
Information Technology ◽  
Stock Market ◽  
Firm Value ◽  
Market Value ◽  
Annual Reports ◽  
Equity Valuation ◽  
Compliance Costs ◽  
Book Value ◽  
It Investments ◽  
Share Prices

In this study, using the recent Y2-compliance expenditures as an example, we examine whether disclosures relating to investments in information technology (IT) were relevant to investors in assessing the market value of equity. We use a sample of 190 firms that disclosed estimates of total Y2K-compliance costs in their 1997 annual reports to examine the association between Y2K-compliance costs and share prices. We test the joint hypothesis that Y2K-compliance costs were relevant to equity valuation of firms that chose to become Y2K-compliant and that these costs were sufficiently reliable to be reflected in share prices. We find that estimates of Y2K-compliance costs were positively and significantly related to share prices after controlling for earnings, book value of equity, and other factors. We find that the stock market is not shortsighted, and consider investments in Y2K-remediation efforts a significant and value-increasing activity for the average firm.

Fundamental Valuation in Seven Asian Countries: Role of Earnings, Book Value, and Dividends

2020 ◽  
pp. 0148558X2094690
Author(s):  
Kriengkrai Boonlert-U-Thai ◽  
Shahrokh M. Saudagaran ◽  
Pradyot K. Sen
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Asian Countries ◽  
Book Value ◽  
International Firms ◽  
Financial Reporting Standards ◽  
Valuation Model ◽  
Prior Use ◽  
Other Information

We examine the role of earnings, book value, and dividends in examining the valuation of firms in select Asian countries. Besides the usual variables of earnings and book value, inclusion of dividends is motivated by prior use of the variable in the literature, as well as an adaptation of the Ohlson 2001 empirical specification of the valuation model. In our specification, absent credible analysts’ forecasts, as is typical in these markets, dividends together with earnings play the role of “other information” in explaining stock prices. In a large sample of Asian firms from seven Asian countries that lack an active analyst community, we document two key results. First, the model with earnings, book value, and dividends outperforms the earnings capitalization, book value, and a model with earnings and book value together, the traditional benchmarks used in the literature. This is in contrast to Ashbaugh and Olsson, 2002 who find that earnings capitalization is the best model for the international firms. Second, the ability of the model to explain stock valuations does not vary materially over time, thus indicating reasonable consistency across different accounting regimes in these countries that may include International Financial Reporting Standards (IFRS) adaptation at different paces. Our finding highlights the information role of earnings and dividends when other channels of information are blocked.

Discussion of “Combining Earnings and Book Value in Equity Valuation”

1998 ◽  
Vol 15 (3) ◽  
pp. 325-341 ◽  
Author(s):  
DAVID BURGSTAHLER
Keyword(s):  
Equity Valuation ◽  
Book Value

The Roles of Earnings and Book Value in Equity Valuation: A Real Options Based Analysis

2002 ◽  
Author(s):  
Peter F. Chen ◽  
Guochang Zhang
Keyword(s):  
Real Options ◽  
Equity Valuation ◽  
Book Value

Combining Earnings and Book Value in Equity Valuation

1997 ◽  
Author(s):  
Stephen H. Penman
Keyword(s):  
Equity Valuation ◽  
Book Value

scholarly journals Do Strategic Alliances, Acquisitions, and R&D Investments Act as Complements or Substitutes?

2016 ◽  
Vol 8 (1) ◽  
pp. 7-20
Author(s):  
Aleksey Martynov
Keyword(s):  
Panel Data ◽  
Absorptive Capacity ◽  
Strategic Alliances ◽  
Optimal Choice ◽  
Substitution Effects ◽  
Sales Growth ◽  
Strategic Choices ◽  
Book Value ◽  
Measures Of Performance

AbstractThis paper studies possible complementarities and substitution effects between such strategic choices as alliances, acquisitions and internal R&D investments. The findings indicate that a firm’s absorptive capacity affects the presence of complementarities and substitution effects among those strategic choices. Firms with high absorptive capacity exhibit substitution effects between alliances and acquisitions and between alliances and internal R&D investments. Firms with high absorptive capacity also exhibit complementarities between acquisitions and additional R&D investments. These results were obtained from panel data of large and medium U.S. companies spanning the years 1998-2009. The results are robust to the use of different measures of performance: profitability, market-to-book value, and sales growth. This paper contributes to our understanding of the role of absorptive capacity for the optimal choice of inter-organizational strategy vs. greater internal R&D investments.

Historical Cost Accrual Methods and the Role of Book Value and Earnings in Linear Valuation Models

1991 ◽  
Vol 6 (2) ◽  
pp. 257-287 ◽  
Author(s):  
Stephen G. Ryan
Keyword(s):  
Book Value ◽  
Historical Cost
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