Investment Growth and the Relation Between Equity Value, Earnings, and Equity Book Value

Posted: 20 Mar 2011 Last revised: 8 Dec 2012

See all articles by Shengquan Hao

Shengquan Hao

Shanghai Jiao Tong University (SJTU)

Qinglu Jin

Shanghai University of Finance and Economics

Guochang Zhang

University of Hong Kong

Date Written: March 17, 2011

Abstract

Using Zhang (2000) as the theoretical basis, we predict and empirically test the effect of investment growth on the relation between equity value and accounting variables. We find that (i) growth increases the slope in the value-earnings relation for high-profitability firms (consistent with growth having positive NPV), but has an insignificant or negative effect on the slope for lower profitability firms (consistent with growth having non-positive NPV); (ii) given earnings, growth increases the (positive) slope of the relation between equity value and equity book value for low-profitability firms, but reduces this slope and causes equity value to decrease with book value for high-profitability firms; and (iii) given profitability (ROE), equity value uniformly increases with book value, and growth increases the slope of this relation. We also examine the valuation impact of past investment activities that arises from accounting conservatism. We find that the earnings coefficient is greater in the years following faster investment increases (which cause earnings to be more conservatively stated).

Keywords: investment growth, equity valuation, earnings, equity book value, profitability, conservatism

JEL Classification: M41, G12

Suggested Citation

Hao, Shengquan and Jin, Qinglu and Zhang, Guochang, Investment Growth and the Relation Between Equity Value, Earnings, and Equity Book Value (March 17, 2011). Accounting Review, Vol. 86, No. 2, 2011. Available at SSRN: https://ssrn.com/abstract=1788689

Shengquan Hao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Qinglu Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China
86-21-65908982 (Phone)

Guochang Zhang (Contact Author)

University of Hong Kong ( email )

KK Leung Building
Faculty of Business and Economics
Hong Kong
+852 3917 1076 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,750
PlumX Metrics