Equity valuation and negative earnings: the role of book value of equity
Article Abstract:
An analysis explains the anomalous negative coefficient on earnings found in the simple earnings capitalization model for loss firms. Earlier studies have challenged the assumptions supporting a positive and homogeneous link between price and earnings across profits and losses. These research have also questioned if the coefficient on earnings is unbiased. To shed light on this issue, it is postulated that the anomalous negative relation between price and earnings for loss firms is the result of a correlated omitted variable problem. A hypothesis supporting this position indicates that the simple earnings capitalization model is incorrectly specified as a result of the exclusion of book value of equity. Evidence was found for the hypothesis, which means that the negative coefficient is due to this misspecification. Three competing explanations for the book value of equity in the valuation of loss firms are discussed.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1999
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Accounting recognition and the relevance of earnings as an explanatory variable for returns
Article Abstract:
Accounting recognition as a primary factor of the ability of earnings to explain returns was examined. The study tested three hypotheses. It was proposed that the impact of accounting recognition in shorter reporting periods would be greater when there is an accounting recognition lag. It was also hypothesized that indications of substantial lag in earnings recognition spur studies of the nature of such a lag. Finally, it was posited that the effect of accounting recognition criteria for earnings measurement varies for companies in different economic circumstances. Data for the study were drawn from a sample of 24,150 company-quarter observations made between 1983 and 1986. Results of the study suggested that the ability of earnings to explain returns is inversely related to the length of the reporting period.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1992
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The information of historical cost earnings relative to supplemental reserve-based accounting data in the extractive petroleum industry
Article Abstract:
The question of whether historical cost earnings of oil companies explain cross-sectional differences in firm security returns is examined. The incremental information of Reserve Recognition Accounting-based (RRA) measures relative to historical cost earnings measurements is also examined. The results of the study suggest that information relevant to valuing oil companies is contained in historical cost earnings and RRA data for the sample period 1979-1981. The results are weaker for the sample period 1982-1984.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1988
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