Relative valuation roles of equity book value and net income as a function of financial health

Article Abstract:

A study was conducted to examine whether predictions that pricing multiples on equity book value and net income are influenced by the financial health of a firm. Bankruptcy tests that were performed on a sample of 396 bankrupt firms and a larger, pooled sample of firms yielded results that are consistent with predictions. Moreover, the explanatory power of book value and of net income displayed predictable differences for firms in three type of industries.

Reporting & Disclosure, Analysis, Valuation, Financial statements, Book value (Accounting)

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Discussion of Carey and Barth, Landsman, and Wahlen

Article Abstract:

Carey, on one hand, and Barth, Landsman, and Wahlen, on the other, discuss the issue of fair value accounting for investment securities in relation to its effectiveness when used by banking institutions. Carey notes certain complications and ambiguities which make analysis difficult although not impossible. The three other authors investigate the tendency of investors to price the increased fluctuation in reported earnings regardless of the risk involved.

Methods, Accounting

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Fair value accounting: effects on banks' earnings volatility, regulatory capital, and value of contractual cash flows

Article Abstract:

The manifold impact of fair value accounting is discussed. Evaluation is undertaken by first viewing earnings and regulatory capital within the context of disclosed investment securities fair values of financial institutions. Results indicate that fluctuations characterize fair value-based revenues to a greater degree than historical cost earnings. Furthermore, the tendency of banks to undermine capital requirements is stronger under fair value.

Accounting, auditing, & bookkeeping, Accounting & Auditing Services, Accounting, Tax Preparation, Bookkeeping, and Payroll Services

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