Author: Wong, Lai-ngor
Title: Value-relevance of earnings and book value in Hong Kong
Degree: M.Sc.
Year: 1999
Subject: Corporate profits -- China -- Hong Kong
Corporations -- Valuation -- China -- Hong Kong
Stocks -- Prices -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Department of Accountancy
Pages: viii, 83, [44] leaves : ill. ; 31 cm
Language: English
Abstract: This study examines the relevance of earnings and book value in determining the market value of firms in the Hong Kong stock market which is well-recognized as having some international aspects. Using Ohlson's linear valuation model that firm value is based on a combination of a pure "flow" model of value and a pure "stock" model of value, this study finds that (i) earnings provides a higher explanatory power on price than book value in Hong Kong (ii) earnings and book value on the pooled basis explain either individually or jointly more variation in security price in Hong Kong than in U.S. (iii) the incremental explanatory power of earnings (book value) in Hong Kong is relatively higher (lower) than in U.S. and (iv) the incremental explanatory power provided by earnings (book value) gives a decreasing (increasing) trend over the past ten years. Furthermore, the findings support the claims that losses contain less value-relevant information than earnings and that earnings at abnormally high or low level will become less value-relevant because it may be considered to contain a higher element of transitory income. Applying the piece-wise linear regression technique, the study finds that price, earnings and book value in Hong Kong generally conform to the convex valuation model developed by Burgstahler and Dichev (1997). The piece-wise linear model provides a better way for the variation in price to be explained by earnings at given level of book value. Further analyses are carried out on the variation in the value-relevance of earnings and book value (i) across industries and (ii) under different market environment. The results do not follow the prediction that book value for some industries like properties and utilities is more value-relevant than earnings. Nevertheless, the results support the prediction that earnings is more value-relevant than book value under the up-market condition while book value is more value-relevant under the down-market condition. Overall, earnings and book value maintain their value-relevance in the past ten years for Hong Kong firms. The higher explanatory power of earnings and book value on price for Hong Kong firms as compared with that for U.S. firms may be attributable to the less disclosure requirement of financial statements and the limited sources of other relevant information in Hong Kong. Though the incremental explanatory power of earnings shows a slightly declining trend for the past ten years, earnings is found to be relatively more important than book value in determining security price in Hong Kong. Price-to-earnings ratio appears to maintain its importance to Hong Kong investors. In view of the fact that the increased value-relevance of book value is not promising, whether the price-to-book ratio emerges to be an financial ratio in Hong Kong is yet to be seen.
Rights: All rights reserved
Access: restricted access

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