Valuation Characteristics of Equity Book Value and Net Income: Tests of the Abandonment Option Hypothesis

Posted: 30 Sep 1996

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

William H. Beaver

Stanford University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Date Written: September 1996

Abstract

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

Barth, Mary E. and Beaver, William H. and Landsman, Wayne R., Valuation Characteristics of Equity Book Value and Net Income: Tests of the Abandonment Option Hypothesis (September 1996). Available at SSRN: https://ssrn.com/abstract=2762

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

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