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Market value vs Book-value

Market value vs Book-value. A project offered by Adam Ostaszewski. Theme: “Can accounting information help to predict firm value ? ” . Theme: “Can accounting information help to predict firm value ? ” . (… Accountants ask). Literature .

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Market value vs Book-value

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  1. Market value vsBook-value A project offered by Adam Ostaszewski

  2. Theme:“Can accounting information help to predict firm value ? ”

  3. Theme:“Can accounting information help to predict firm value ? ” (… Accountants ask)

  4. Literature • Burgstahler, D.C., and Dichev, I.D., (1997), "Earnings, Adaptation and Equity Value", Accounting Review, Vol 72, No.2. • Zhang, G., (2000), "Accounting Information, Capital Investment Decisions, and Equity Valuation: Theory and Empirical Implications", Journal of Accounting Research, Vol 38, No. 2, 271- 295.

  5. Classic identities • (Miller-Modigliani) Present Value of dividend stream • St=∑∞τ=1 γ τ E t [d t+τ ]. • E refers to risk-neutral measure, or assumes constant returns to obtain this. γ = 1/(1+r) • Associated Model: (Gordon) constant dividend growth => a linear valuation formula (add up G.P.) • But, dividend series highly unstable

  6. Classic identities -2 • However, “residual income” series more stable … • Discounted residual income (RI) stream identity: • St=Bt+∑∞τ=1γ τ Et [ŷt+τ ]. • Ingredients: book value Bτ (historic cost convention), earnings yτ & opportunity cost rBτ - (refers to required rate of return r), so that • yτ = Bτ - B τ - - d τ • ŷτ = yτ - r Bτ -(= RI )

  7. Classic identities -2 • Associated model: Feltham-Ohlson AR(1) recursion - constant persistence ω of RI and unaccounted data xτ p plus errors ε and η • yτ+= ωyτ+xτ+ ε τ+ • xτ+= gxτ+ η τ+ • Again gives linear valuation in terms of yτ.

  8. Empirical study • Plot MV (market value) vs. E (earnings)? • … • inter firm comparisons? • … relative to B = Book-value • Plot MV/B vs. E/B?

  9. So what are the facts? • Plot MV/B vs. E/B • Is the relation near linear? • …Look …

  10. Call-like Valuation ? Market/Book vs Earnings/Book

  11. Call-like Valuation ? Market/Book vs Earnings/Book

  12. Call-like Valuation ? Recursion value Market/Book vs Earnings/Book

  13. Call-like Valuation ? Recursion value Adaptation value

  14. Call-like Valuation ? Recursion value Adaptation value

  15. Call-like Valuation ?

  16. Multiple option ?

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