Earnings in Firm Valuation and Their Value Relevance

Journal of Contemporary Accounting & Economics, Forthcoming

Posted: 8 Oct 2016

See all articles by Victoria Clout

Victoria Clout

School of Accounting, Auditing & Taxation, UNSW Business School, UNSW Australia; Hanken Centre for Corporate Governance

Roger J. Willett

Victoria University of Wellington - Te Herenga Waka - Victoria Business School

Date Written: 2016

Abstract

This paper examines the explanatory power of earnings in equity valuation and value relevance of earnings through a combination of cross-section and time series regression analysis. Cross-section models are based upon all US firms with a 31 December year-end in the Compustat files between 1960 and 2009. Time series models are based on a sample of 30 long-lived firms with 55 years of continuous data through to 2009. The cross-section models show a decreasing magnitude in the elasticity of market value with respect to earnings over time relative to book value, suggesting a decline in value relevance of earnings. However, we show the pattern of a reducing value relevance of earnings is explained by an increasing incidence of reported losses. The value relevance of other income not reported immediately through the income statement is uniformly low over the entire period studied. We find no direct evidence that the increased incidence of losses is due to poor earning quality or earnings management.

Keywords: value-relevance, earnings, cross-section, time-series, other comprehensive income, earnings management, earnings quality

JEL Classification: M40, M41, G12, G32

Suggested Citation

Clout, Victoria and Willett, Roger J., Earnings in Firm Valuation and Their Value Relevance (2016). Journal of Contemporary Accounting & Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2841738

Victoria Clout (Contact Author)

School of Accounting, Auditing & Taxation, UNSW Business School, UNSW Australia ( email )

Sydney, NSW, NSW 2052
Australia
+6193856957 (Phone)

Hanken Centre for Corporate Governance ( email )

Hanken School of Economics
Helsinki
Finland

Roger J. Willett

Victoria University of Wellington - Te Herenga Waka - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

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