Searching for value relevance of book value and earnings: a case of premium vs. discount firms

Aleksanyan, M. and Karim, K. (2013) Searching for value relevance of book value and earnings: a case of premium vs. discount firms. Review of Quantitative Finance and Accounting, 41(3), pp. 489-511. (doi: 10.1007/s11156-012-0318-8)

Abstract

We examine the premium/discount firm characteristic that fundamentally affects the value relevance of two key accounting line items, earnings and book values. We argue that from the perspective of both the residual income and option-style valuation models, the relative valuation roles of earnings and book values differ fundamentally between firms that trade at a premium vis-à-vis discount to book value. We find that book values play a significantly more important role in equity valuation than earnings when firms trade at a discount. We also find that other known influential conditions, such as the sign of earnings (Collins et al. 1999) or the relative levels of earnings and book value (Burgstahler and Dichev 1997), become inconsequential when the premium/discount condition of the firm is controlled for. The discovered relationships between the relative valuation roles of book values and earnings and the discount/premium characteristics of the firm are robust to the effect of time, information environment and the industry of the firm.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Karim, Dr Khondkar and Aleksanyan, Dr Mark
• Authors: Aleksanyan, M., and Karim, K.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Review of Quantitative Finance and Accounting
• ISSN: 0924-865X
• ISSN (Online): 1573-7179
• Copyright Holders: Copyright © 2012 Springer
• First Published: First published in Review of Quantitative Finance and Accounting
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher