Valuation Characteristics of Equity Book Value and Net Income: Tests of the Abandonment Option Hypothesis
Posted: 30 Sep 1996
Date Written: September 1996
This study tests hypotheses about effects of the abandonment option on equity book value and net income valuation characteristics. As predicted, pricing multiples on and explanatory power of book equity (net income) increase (decrease) as firms approach liquidation or bankruptcy. Also, pricing multiples on and explanatory power of book equity (net income) are higher (lower) for approximately one-half of Compustat firms classified as less financially healthy, providing evidence inferences are not limited to firms approaching extreme financial distress. Net income and equity book value valuation characteristics vary predictably across three illustrative industries, selected based on extent of unrecognized intangible assets.
JEL Classification: G12, G33, M41
Suggested Citation: Suggested Citation