Equity valuation, negative earnings and book value : evidence from Hong Kong

Pao Yue-kong Library Electronic Theses Database

Equity valuation, negative earnings and book value : evidence from Hong Kong

 

Author: Chan, Chi-man Philip
Title: Equity valuation, negative earnings and book value : evidence from Hong Kong
Degree: M.Sc.
Year: 2001
Subject: Stocks -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Accountancy
Pages: x, 80 leaves : ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1573186
URI: http://theses.lib.polyu.edu.hk/handle/200/3781
Abstract: In this thesis, I perform empirical research using 3,945 firm-year observations of firms listed on The Stock Exchange of Hong Kong for the 1979 - 1998 period to investigate the existence of mis-specification of simple earnings capitalisation model. Briefly, Hong Kong evidence reported in this thesis is in common with the U.S. evidence as documented by Collins, Pincus and Xie (1999). In summary, this thesis demonstrates an anomalous significantly negative price-earnings relation using the simple earnings capitalisation model for firms reporting losses is due to omitting book value of equity in the valuation specification. Results of various tests support the hypothesis that including book value of equity in the valuation specification eliminates the negative relation. It further attests that the omission of book value of equity induces a negative (positive) bias in the coefficient on earnings for loss (profit) firms and book value is positively correlated to stock price but negatively correlated with earnings for loss firms. In addition, the results highlight the relative importance of earnings and book value of equity for profit against loss firms and reveal that current earnings is more important than book value of equity in the valuation of profit firm, but book value of equity generally appears to be equally important for both groups even under the more properly specified model that includes both earnings and book value of equity. It suggests that security price-earnings relation is not both positive and homogenous over the entire range of earnings realisation across profit and loss firms. In addition, the capitalisation rate on earnings would be biased downward (upward) if loss (profit) firms dominate the sample and book value of equity is omitted from the specification. I hope that the results reported in this thesis provide further evidence from Hong Kong perspective to accord with U.S. evidence on the usefulness of the inclusion of book value of equity as an value-relevance variable in the simple capitalisation model in explaining stock market price.

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