Content uploaded by Daniel W. Collins
Author content
All content in this area was uploaded by Daniel W. Collins on Aug 27, 2014
Content may be subject to copyright.
Equity Valuation and Negative Earnings
Abstract
The assumption of a positive and homogeneous price-earnings relation across earnings realizations is examined. We seek to explain an anomalous negative price-earnings relation for firms reporting losses, and hypothesize the negative relation is caused by one or more omitted variables positively correlated with stock price but negatively correlated with current earnings. We consider three such correlated omitted variables -- earnings turnaround, prospects of becoming a takeover target, and book value of equity -- based on valuation or econometric arguments for their inclusion in a price-earnings model specification. We find that including beginning-of-year book value of equity eliminates the negative price-earnings relation for loss firms. Thus, the simple earnings capitalization model is misspecified, and the negative price-earnings relation is an outcome of this misspecification. We also show that the coefficient on earnings in the simple earnings capitalization model is positively biased for profit firms, and that the price-earnings relation is not homogeneous across profit and loss firms even after controlling for book value of equity. Additional analyses suggest book value of equity serves as a value-relevant variable rather than as a control for scale differences.
... Francis dan Schipper (1999) 1978). Informasi nilai buku juga merupakan atribut yang dapat digunakan karena berperan sebagai proksi yang relevan dengan nilai laba pada masa depan yang diharapkan (Collins et al., 1999). ...
... Nilai buku mencerminkan nilai sekarang dari pendapatan normal masa depan yang diinginkan atau diharapkan. Menurut Collins et al., (1999), hal ini karena perusahaan diharapkan dapat menghasilkan pengembalian aset bersih yang sama dengan biaya modal ekuitas yang diharapkan. Nilai buku dapat dijadikan proksi relevansi nilai untuk pendapatan normal masa depan yang diharapkan. ...
... Al-Ani dan Tawfik (2021) Nilai buku mencerminkan nilai sekarang atas pendapatan masa depan yang diharapkan. Hal ini karena perusahaan diharapkan dapat menghasilkan pengembalian dari aset bersih yang sama dengan biaya modal ekuitas yang diharapkan (Collins et al., 1999). Nilai buku diproksikan dengan book value per share (BVPS) yang merepresentasikan ekuitas pemilik saham biasa dalam aset bersih perusahaan. ...
Book value and profit are considered relevant financial information. However, in some cases, the value relevance of profit and book value has decreased. This causes investors to look for other financial information, such as intangible assets. Intangible assets can be used as an indicator in measuring the relevance and a relevant proxy for expected future earnings because they are considered the driver of company growth and productivity nowadays. This study used the multiple linear regression method. The object of this study is manufacturing companies listed on the Indonesia Stock Exchange. The samples are selected using the purposive sampling method. The findings of this study are that profit, book value, and intangible assets have a significant and positive effect. This study hopes that investors can use intangible assets as additional information to predict investment returns and make investment decisions.
... While they show the effect of accounting losses on value relevance, they do not delve into the effect of loss persistence on value relevance. Similar findings were put forward by Hayn (1995); Jan and Ou (1995); Collins, Pincus, and Xie (1999).. ...
... Barth, Li, and McClure (2018), citing Lev and Zarowin (1999); Brunnermeier and Nagel (2004) ;Dontoh, Radhakrishnan, and Ronen (2004), proffer three possible reasons for the decline in value relevance of earnings. The presence of more loss firms as given by Collins et al. (1999) is one of the factors. Another factor put forward is the growing influence of investments in intangible assets on future earnings. ...
... If losses can persist but the firms still remain in business, it means that the losses can provide relevant information for firm valuation. The proposition by Collins et al. (1999) that simple earnings capitalisation models are mis-specified due to the omission of book value of equity, a correlated omitted variable in the models, and informs this study to include book value of equity in all the models. Kwon (2017) investigated the value relevance of accounting information to profit and loss firms in South Korea. ...
This paper investigates the impact of negative earnings persistence on value relevance of earnings before interest and taxes (EBIT) and book values for twenty-seven non-financial firms listed on the Zimbabwe Stock Exchange (ZSE). Negative earnings are perceived to be persistent where firms reported losses in at least 25% of the time over the eight-year study period. Two-step System GMM was used, with average debt equity ratio and net asset value per share being additional regression instruments. The regressions were primarily done on the ZSE full sample, and then on a profit-reporting firms sample. The loss-reporting firms sample was too small for meaningful regressions. It was found that when loss-firms were removed from the sample, value relevance of EBIT and book value declined. This means that investors are very meticulous with firms they perceive to be persistent loss-makers but tend to be complacent with profit-firms.
... However, recent empirical studies assume a non-linear role of either earnings or book value in the valuation function, which depends on the levels of these two variables in the model, Burgstahler and Dichev (1997), Zhang (2000); Hayn (1995) and Collins et al. (1999), for example. Findings by Collins et al. (1999) indicate that, "the relative and the incremental importance of earnings versus book value in explaining equity value vary with the level of earnings". ...
... However, recent empirical studies assume a non-linear role of either earnings or book value in the valuation function, which depends on the levels of these two variables in the model, Burgstahler and Dichev (1997), Zhang (2000); Hayn (1995) and Collins et al. (1999), for example. Findings by Collins et al. (1999) indicate that, "the relative and the incremental importance of earnings versus book value in explaining equity value vary with the level of earnings". ...
... Studies relating equity values to balance sheet items include Landsman (1986), Barth (1991) and Shevlin (1991). Other studies relating both balance sheet and income statements items (book value of equity and earnings) to valuation of equity can be found in the literature, see Amir and Lev (1994), Ohlson (1995), Feltham and Ohlson (1995), Collins et al. (1997), and Collins et al. (1999). ...
The study aims at knowing the neural networks, their components, neuron cells and
their mechanism. One of these networks types is the most common in digital systems,
Perception that is Perceptron network or as called touch networks. An equation of how
these networks work was studied in order to design new system.
... However, recent empirical studies assume a non-linear role of either earnings or book value in the valuation function, which depends on the levels of these two variables in the model, Burgstahler and Dichev (1997), Zhang (2000); Hayn (1995) and Collins et al. (1999), for example. Findings by Collins et al. (1999) indicate that, "the relative and the incremental importance of earnings versus book value in explaining equity value vary with the level of earnings". ...
... However, recent empirical studies assume a non-linear role of either earnings or book value in the valuation function, which depends on the levels of these two variables in the model, Burgstahler and Dichev (1997), Zhang (2000); Hayn (1995) and Collins et al. (1999), for example. Findings by Collins et al. (1999) indicate that, "the relative and the incremental importance of earnings versus book value in explaining equity value vary with the level of earnings". ...
... Studies relating equity values to balance sheet items include Landsman (1986), Barth (1991) and Shevlin (1991). Other studies relating both balance sheet and income statements items (book value of equity and earnings) to valuation of equity can be found in the literature, see Amir and Lev (1994), Ohlson (1995), Feltham and Ohlson (1995), Collins et al. (1997), and Collins et al. (1999). ...
The study aims at knowing the neural networks, their components, neuron cells and their mechanism. One of these networks types is the most common in digital systems, Perception that is Perceptron network or as called touch networks. An equation of how these networks work was studied in order to design new system.
... Sejumlah studi information content [Ball dan Brown (1968), Beaver et al. (1979), Ball dan Kothari (1991), Skinner (1994), Hayn (1995), Collins et al. (1999 15 Manajemen laba (earnings management) adalah pilihan seorang manajer terhadap kebijakan-kebijakan akuntansi tertentu untuk mencapai beberapa tujuan spesifik (Scott, 2003). Motifnya adalah untuk (1) memaksimumkan utilitasnya dalam menghadapi kontrak kompensasi dan kontrak hutang serta political costs, (2) melakukan kontrak efisien, terutama dalam employment contracting dan lending contracting, dan atau (3) melindungi kepentingan manajer dan juga perusahaan dari hal-hal yang tidak terduga. ...
... Dugaan tersebut di atas juga merujuk pada argumentasi Hayn (1995) dan Collins et al. (1999 Untuk menganalisis pengaruh dari masing-masing variabel KILK terhadap besaran relevansi nilai ILK, berikut ini dipaparkan pengembangan dan perumusan hipotesis berkenaan dengan pengaruh dari kandungan laba dan tingkat manajemen laba. ...
This study investigates the value-relevance of financial statements information (hereafter, FSI) to stock market over time. The issue is crucial to investigated due to growing a claim in capital market community in the recent years that financial statements of Indonesian public firms had lost or deteriorated their relevance to stock market. The same claim also upwards in US and other countries. However, value-relevance studies investigated the claim report inconclusive evidence. The main limitation of the studies is that their valuation basis relies only on the Ohlson (1995) valuation theory.
The studies ignore efficient capital market (ECM) theory in which over last decades used in the information content studies. Besides, the studies do not yet take account of the impact of growth level of financial statements numbers (GLFSN), the quality of FSI (QFSI) and the disclosure quality of FSI (DQFSI) as moderating variables having contingency effect to the relevance of FSI. Therefore, this study applies both the Ohlson (1995) valuation theory and ECM theory (Beaver, 1998) as valuation basis. The study also considers GLFSN, QFSI and DQFSI as moderating variables.
This study hypothesis: First, value-relevance of FSI to stock market does not decline over time. Second, GLFSN has significantly effect in increasing value relevance of FSI, and the relevance of financial statements having positive GLFSN is higher than of ones having negative GLFSN. Third, QFSI has significantly effect to enhance value relevance of FSI, and relevance of financial statements having net income containing transitory components is lower than of ones having permanent earnings. It is also supposed that the relevance of financial statements having low earnings management (LEM) level is
higher than of ones having high earnings management (HEM) level. Fourth, DQFSI has significantly effect in increasing value-relevance of FSI. The relevance of financial statements containing intangible assets is higher than value relevance of ones not containing intangible asset, and value-relevance of financial statements released at the early date is higher than of ones released at last minute of the required reporting date.
Using sample from listed manufacture firms at the JSX over 1995-2004, the results indicate that financial statements have still value relevance over time, although its relevance tends to low. In spite of the fact that around event periods of financial statements releases (t.-2, 2 and t.-1, 1) the relevance tends to decline (reject Ho1), but at the announcement date (t.0) its relevance has a tendency to increase over time
(accept Ho1). This study also documents few findings as follows: 1) GLFSN and QFSI do not have contingency effect in increasing value relevance of FSI (reject H2a and H3), while DQFSI have contingent effect in increasing the relevance (accept H4); 2) value relevance of financial statements containing positive GLFSN, permanent earnings and LEM is lower than of ones containing negative GLFSN, net income with transitory earnings components and HEM (reject H2b, H3a dan H3b); and 3) value relevance of financial statements containing intangible assets and released at the early date is higher than of ones not containing intangible assets and released at the end of the required reporting date. This study concludes that the relevance of FSI after including GLFSN and LEM tends to decline at t.-2, 2 and t.-1,1, but it raises significantly at t.0. And, the relevance of FSI after including DQFSI tends to increase significantly at the time t.-2, 2, t.-1,1 and t.0.
Keywords: value-relevance, information quality, disclosure quality, contingency effect, permanent
... We also follow the prior literature (e.g., Dechow, Hutton, & Sloan, 1999;O'Hanlon & Steele, 2000) and exclude observations with negative earnings, as these observations are unlikely to provide a meaningful anchor for valuation (Easton, 2007), and the importance of earnings to valuation of loss firms can differ to valuation of profitable firms (Collins, Pincus, & Xie, 1999). Table 1 presents the summary statistics of all key variables. ...
We examine the impact of the U.K. Bribery Act 2010 on the implied cost of equity. We find a significant reduction in the cost of equity amongst U.K. firms with high bribery exposure after the passage of the Bribery Act. We further show that the Bribery Act improves internal control system and increases stock liquidity of firms with high bribery exposure. Our results suggest that more stringent anti‐bribery regulations are not always bad for the firm.
This article is protected by copyright. All rights reserved
... Menurut Karakaya dan Khalil [10] tingkat capaian laba perusahaan merupakan cerminan kinerja keuangan yang sering disebut profitabilitas. Temuan berbagai studi terdahulu menyebutkan bahwa determinan tingkat laba yang handal antara lain variabel kinerja investasi return on investment [11,12], nilai perusahaanprice book value [13,14]; dan risiko keuangan-leverage [15,16]. ...
This study aims to examine the relationship of investment performance, financial leverage, firm value, and income smoothing practices to the profitability. The study was conducted on 45 construction companies listed on the IDX in 2014-2018, which were tested by regression analysis. This finding empirically has proven that investment performance, financial leverage, and company value have a significant effect on the level of corporate profits, but income-smoothing practices are found do not effect. This research provides a practical contribution to management as a basis for considering what variables need to be considered for increasing company profits.
... Hasil studi Collins et al. (1997) Secara umum, sejumlah studi value relevance di AS telah melaporkan bahwa laporan keuangan masih memiliki relevansi nilai untuk pasar saham Amir dan , Collins et al. (1997), Nwaezu (1998), Collins et al. (1999), Chang (1999), Ely dan Waymire (1999), Francis dan Schipper (1999), Lev dan Zarowin (1999), Brief dan Zarowin (2000), Gu (2002), Ryan dan Zarowin (2003), Core et al. (2003), dan Easton dan Sommers (2003) ...
This study analyzes the issue regarding the impact of intangible assets reporting on the value relevance of financial statements to stock market investors in Indonesia. Analysis of the issue is important because in recent years claims have developed among capital market players that Indonesia's public corporation financial statements have lost their relevance to the stock market. Similar claims have also developed in a number of developed and developing countries. However, the results of my literature review show that the researchers conducted showed inconclusive results. Previous studies have also not considered the impact of intangible assets information reporting on the value relevance of financial statement information. Therefore, this study investigates the value relevance of financial statements for the stock market by entering intangible assets information as a moderating variable. This study uses Ohlson's (1995) valuation theory and Efficient Capital Market Theory (Beaver, 1998) as a theoretical basis and model. This study also applies the event study method and the abnormal return / unexpected model as a valuation basis. This study hypothesizes that: First, the relevance of the value of financial statements for the stock market does not decrease over time. Second, intangible assets reporting has a positive effect on increasing the value relevance of financial statements for the stock market. Third, the relevance of the value of financial statements containing intangible assets is greater than the value relevance of financial statements that do not contain intangible assets. By using a sample of public companies listed on the Jakarta Stock Exchange during 1995-2004, the results indicate that financial reports still have value relevance for the stock market and do not decrease from year to year. The results of this study also show that intangible assets reporting has a contingent effect that significantly increases the value relevance of financial statements at the date of publication of financial statements. In addition, it is also reported that the relevance of the value of financial statements containing intangible assets is greater than financial statements that do not contain intangible assets. This finding has a policy implication that the government and the Indonesian Institute of Accountants (IIA) need to issue regulations to encourage companies to expand the recognition, measurement of the value, recording and reporting of intangible assets information in corporate financial reporting.
... Este artigo objetiva contribuir com as pesquisas das áreas de Finanças e Contabilidade, principalmente em países emergentes e com pouca diversidade empresarial, mas com muita heterogeneidade entre as empresas, como o Brasil ( Brito & Vasconcelos, 2004), fornecendo evidências de que a utilização de um método de estimação mais robusto do que o ordinary least squares (OLS) possa gerar resultados mais confiáveis. Este tema torna-se importante porque, ao longo dos anos, vários trabalhos buscaram analisar e melhorar os modelos de value relevance, além de relacionar as informações financeiras com os valores de mercado das firmas e os retornos das ações (Collins, Maydew, & Weiss, 1997), explicando a associação negativa e significante da relação preço-lucro para empresas com prejuízo (Collins, Pincus, & Xie, 1999), analisando a capacidade informativa dos lucros e dos valores patrimoniais (Francis & Schipper, 1999), explorando o controle para diferenças nas regressões dos modelos de value relevance (Brown, Lo, & Lys, 1999), entre outros temas abordados. ...
This study aimed to investigate the quality and impact of value relevance models of financial information using quantile regression (QR) compared to the ordinary least squares (OLS) methods. Following the principles and foundations of Ohlson (1995), Feltham and Ohlson (1995) and Ohlson and Kim (2015), it was possible to use a comparison parameter between models for evaluating the relevance of accounting information. Therefore, we applied two tests (A and B), with two models each as in Ohlson and Kim (2015), one with the dependent variable as net income in the following period and, second, as company market value in the current period. Given this theme, quantile regression showed to be more efficient and have less possibilities for estimation errors than OLS, at least under the strict conditions of this work. Therefore, we recommend the estimation of quantile regression in models that use accounting and financial information, since heteroscedasticity and outliers are commonly found in these types of data, and because this estimation method is less sensitive and more robust to such conditions typically displayed by the data of this research field.
Abstract
This study investigates the value-relevance of financial statements information (hereafter, FSI) to stock market over time. The issue is crucial to investigated due to growing a claim in capital market communities in the recent years that financial statements of Indonesian public firms had lost or deteriorated their relevance to stock market. The same claim also upwards in US and other countries. However, value-relevance studies investigated the claim report inconclusive evidence. The main limitation of the studies is that their valuation basis relies only on the Ohlson (1995) valuation theory. The studies ignore efficient capital market (ECM) theory in which over last decades used in the information content studies. Besides, the studies do not yet take account of the impact of growth level of financial statements numbers (GLFSN), the quality of FSI (QFSI) and the disclosure quality of FSI (DQFSI) as moderating variables having contingency effect to the relevance of FSI.
Therefore, this study applies both the Ohlson (1995) valuation theory and ECM theory (Beaver, 1998) as valuation basis. The study also considers GLFSN, QFSI and DQFSI as moderating variables. This study hypothesis: First, value-relevance of FSI to stock market does not decline over time. Second, GLFSN has significantly effect in increasing value relevance of FSI, and the relevance of financial statements having positive GLFSN is higher than of ones having negative GLFSN. Third, QFSI has significantly effect to enhance value relevance of FSI, and relevance of financial statements having net income containing transitory components is lower than of ones having permanent earnings. It is also supposed that the relevance of financial statements having low earnings management (LEM) level is higher than of ones having high earnings management (HEM) level. Fourth, DQFSI has significantly effect in increasing value-relevance of FSI. The relevance of financial statements containing intangible assets is higher than value relevance of ones not containing intangible asset, and value-relevance of financial statements released at the early date is higher than of ones released at last minute of the required reporting date.
Using sample from listed manufacture firms at the JSX over 1995-2004, the results indicate that financial statements have still value relevance over time, although its relevance tends to low. In spite of the fact that around event periods of financial statements releases (t.-2, 2 and t.-1, 1) the relevance tends to decline (reject Ho1), but at the announcement date (t.0) its relevance has a tendency to increase over time (accept Ho1). This study also documents few findings as follows: 1) GLFSN and QFSI do not have contingency effect in increasing value relevance of FSI (reject H2a and H3), while DQFSI have contingent effect in increasing the relevance (accept H4); 2) value relevance of financial statements containing positive GLFSN, permanent earnings and LEM is lower than of ones containing negative GLFSN, net income with transitory earnings components and HEM (reject H2b, H3a dan H3b); and 3) value relevance of financial statements containing intangible assets and released at the early date is higher than of ones not containing intangible assets and released at the end of the required reporting date. This study concludes that the relevance of FSI after including GLFSN and LEM tends to decline at t.-2, 2 and t.-1,1, but it raises significantly at t.0. And, the relevance of FSI after including DQFSI tends to increase significantly at the time t.-2, 2, t.-1,1 and t.0.
ResearchGate has not been able to resolve any references for this publication.