Factors Affecting the Valuation of Loss- Relative to Profit-Making Firms in the UK
Speaker
Abstract
| This paper is the first study in the UK to explore accounting items that are associated with market value for loss-making firms. We find that the Darrough and Ye (2007) model generally works in the UK in helping removing negative relation between earnings and market value. We expand and modify their model, and report a series of value relevant factors for loss firms, such as book value, RD, capital expenditures, dividends, cash balance, capital contributions and sales strategy. Specifically, while the actual dividend paid is positively valued by the market, the dummy variable capturing whether a firm pays dividends is negatively valued. For profit firms, besides value relevant variables introduced by previous cross-sectional studies, we show other variables associated with market value such as sales and cash balance. Further, by allowing the coefficients on variables to vary between profit and loss firms, we find that earnings (book value) have lower (higher) weight for loss firms than for profit firms. This is consistent with the abandonment/adaptation option theories and the limited liability feature documented in the literature. Extraordinary/exceptional items and capital contributions have lower weights for loss firms than for profit firms. Also, compared with Akbar and Stark (2003), we indicate that their pooling the two subsamples together loses information and hides relative importance of earnings and dividends. |
| Contact information: |
| Paolo Perego |
