The Valuation of Loss Firms: A Stock Market Perspective

Abstract

The proportion of exchange-listed firms with negative earnings has increased to over 40% in recent years. Given that the fundamental value of these loss firms is difficult to determine, we expect particularly strong value effects among these firms. We find that the return predictability associated with book-to-market and revenue-to-price is indeed significantly stronger compared to gain firms. Our further analyses on financial analysts, earnings announcement returns, short selling activities, option trading, and limits to arbitrage support a behavioral mechanism for our main finding.

Keywords: Loss Firms, Firm Valuation, Value Effect, Stock Mispricing

JEL Classification: G02, G12, G14, M41