Valuation Properties of Accounting Numbers in Brazil

Abstract

this work investigates the valuation properties of accounting numbers in Brazil under three traditional frameworks: earnings capitalization, book value of equity and residual income. The sample be selected from companies traded at the Sao Paulo Stock Exchange (BOVESPA) from 1995 to 1999, dividing the sample in two groups: companies with preferred and with common shares. My results show that the earnings capitalization model did not perform well for common shares and have a better performance for preferred shares because of the mandatory dividend distribution as a percentage of net income in Brazil and because earnings have no use as information asymmetry reducers in Brazil. The book value model performed better for common shares than for preferred shares while residual income had a comparable performance. This demonstrates that book value seems to be the dominant accounting-based valuation model for common shares. For preferred shares the residual income model performs better. The residual income term alone presents no significant difference for the two sets of companies. For both set of companies accounting income did not incorporated economic income.

Keywords: valuation, emerging markets, international accounting, residual income, quality of earnings

JEL Classification: C21, D82, G12, G39, M41, M47