Wang (2005) - Wancherng Wang

Wang (2005) found that firm market value represented by exchange ratio (ER) can be explained by financial measures (accounting numbers) as well as non financial measures. Financial measures explain 50% whereas non financial measures explain 40%.

Brown, Lo and Lys (1999)

Brown, Lo and Lys (1999) claim value relevance of accounting numbers are in fact declining for the past 4 decades. This claim is contradicting the results of studies done by Collins et al. 1997 whereby the value relevance of accounting numbers are increasing and decreasing over the years.

Brown et al. (1999) suspected that the increase or decrease is due to the effect of scale. They tested the association between market value and scale. They concluded that the increase or decrease in value relevance of accounting numbers is affected by the interaction between the coefficient of scale and book value and earnings that resulted in increase or decrease in value relevance of accounting numbers measured by R2.

(To be continued)

Ball and Brown, 1968

Ball and Brown (1968) work is very important to be understood by researchers in equity valuation. At the time the study was done, there were claims that earnings figure was not accurate and therefore not relevant in equity valuation. In response to these claims, Ball and Brown conducted a study to obtain evidence that in fact earnings information is very useful and contain information to explain market value.

They used the following valuation model:

PRjm=(Pjm+1 + djm)/Pjm,

where, PRjm is relative monthly price of firm j at month m, Pjm is opening price of firm j of month m, djm is dividend of firm j at month m and Pjm is closing price of firm j at month m.

Ohlson [1995]

Ohlson is a big name in capital market research in Accounting. He has conducted various studies in this field and developed a capital market research model in 1995. His popular model has been tested, discussed and commented by many other researchers including Kothari [2001]. The model is as follows:

MVE = a + b1E + b2BVE
R = a + b1E
OCF = a + b1E

In this model, earnings [E] and book value of equity [BVE] are said to have significant relationship with market value of equity [MVE]. Earnings is also significantly related to stock return. Lastly, earnings can also significantly predicts operating cash flow.

Article Review

This blog is initiated for the purpose of reviewing articles related to my proposed area of study. InsyaAllah I will start my article review soon.