Literature Review
Question:
Discuss about the Book Value And Valuation Of Earnings.
This research proposal is successful due to overwhelming support from the school administration. I am thankful to my colleagues who helped me complete the project. I especially thank the Lecturers for the provision of expertise and insight that helped the research process. I am thankful to everyone who supported me during the project either directly or indirectly. Your professional advice and guidance taught me a real-life situation and scientific research. I would also like to give thanks to my supervisors who helped me with varied encouragement and information. You supported me during the hardest time. Lastly, I confirm that I have keenly monitored and taken into consideration the University misconduct policy. I acknowledge the importance of quotation marks, sources of ideas and references when quoting someone else’s work.
This research proposal aims at studying book value and valuation of earnings. This topic plays a core role in recent empirical financial and theoretical accounting research. Both book value and earnings are core variables in the model of theoretical accounting valuation. This research proposal investigates the valuation functions of book value and earnings from the perspective of intercontinental accounting systems of France, Germany, and the U.K. There is a need to price the items of financial statement in the form of predicted and valuation equation. Nevertheless, the confirmation of value relevance of accounting info is to check the reliability and validity of financial statement prepared by the company. It explains that accounting variables are important when related to data used by various financiers in calculating share prices.
The hypotheses of this study established based on accounting aspects that highlight book value and valuation of earnings: 1) the extent of accounting conservatism, and 2) the actual value significant of an income statement and balance sheet information. This paper examines them in the context of the system of accounting of France, Germany, and U.K. The paper is arranged as follows: Part one presents the motivation. The second part discusses literature review. The third part offers the Research method. The fourth part is the conclusion followed by list of reference.
The issue is essential to accountant, managers, public and regulators because it provides information concerning stock market efficiency. The data collected by both parties can be used for the decision-making process (Pervan & Vasilj 2013). The investors can also use the stock market valuation of earning in the calculation of the present and future share prices. Thus, investors can decide whether to invest in specific investments based on the profitability of the business opportunity. Managers are also capable of measuring the economic events of the organization as defined in the accounting regulation.
Research Method
Conservatism in financial reporting is significant in that it acts as the firm’s efficient technologies used in the governance process. The theoretical basis of this study embraces a measurement approach that encompasses financial reporting reasoning and contextual accounting. It also entail a valuation that enables the researcher and users of accounting information to help in forecasting how different information component and accounting variables describe the market value. The valuation theory can also assist in structuring necessary analysis (Rabier, 2017). It enables the researcher to detect various attributes to concentrate on any task that is vital to valuation. Most of the recent value research derives from the known theories of valuation. Such a valuation theory is no extraordinary as the research proposal indirectly and directly, depends on the book value and the stock market valuation.
Existing literature on empirical evidence on the importance of accounting information originates from the U.K Market. The value importance of earnings on a stock return for a specified time from have been investigated. The studies have discovered that the business earnings are positively correlated to the stock return. Nevertheless, when combined data of the firm’s profit are taken into consideration, the movements of stock are closely connected to returns (Barth & Landsman, 2018). Most of the studies have discovered that both book value and earnings considerably depend on the market value. Other studies have found that explanatory power of book value and earnings variables systematically vary across industries (Zolotoy, Frederickson & Lyon, 2017).
Research works of different authors have explored the unusual relationship between accounting variables and share prices by use of data from Germany, United Kingdom, and France. The joint explanatory power of 3 variables is approximately 60% (France), 70% (United Kingdom) and 40% (Germany). They also enlighten through their finding that explanatory control of both the variables differ regarding the accounting systems within the three countries. The book value gives more details of earnings in France and Germany as compared to earnings in the United Kingdom (Bhatia & Mulenga, 2017). Another study conducted by Graham on international accounting differences and inspected value relevance, current residual income and book value regarding shares. The Graham study revealed that the variable’s coefficients are statistically significant for all the three countries (Carpenter & Whitelaw, 2017).
The value importance of book value, earnings and the actual return on equity regarding share prices have also been investigated. There was an application of time series cross-sectional and cross-sectional regression for the analysis of the data. The study discovered that return on equity, book value and earnings have significant positive value on the securities of the market value (Delkhosh, Malek, Rahimi & Farokhi, 2017). The conservatism differences in the accounting system in France, U.K, and Germany have been studied. The hypothesis envisaged that regression of book value and price on earnings should have the coefficient being much more significant in France and Germany than in U.K (Alkali, Zuru & Kegudu, 2018).
Conclusion
In this study, the core theme is the book value and valuation of earnings. The rule of accounting system in the world requires organization’s financial statements to combine both the income statement and the balance sheet (Hribar, Melessa, Mergenthaler & Small, 2018). The hypotheses are:
Hypothesis 1: The accounting info represents a determinant which affects stock price valuation of companies in capital market
H1a: The stock price valuations is directly related to the earnings per share
H2b: The stock price valuation is directly related to book value per share
Hypothesis 2: Book value is increasingly value relevant than earnings per share in stock price valuation
Hypothesis 3: The relevance of book values and earnings declines when companies have adverse earnings.
In this part, I explain the statistical test that I will perform to determine the prediction outlined in the hypotheses. The experiments concentrate mostly on the book value, the power of earnings and the coefficient of book value and earnings. The actual data from the German, France and United States are derived from the database of Global Vantage Industrial Commercial (Ball, Gerakos, Linnainmaa & Nikolaev, 2017). The monthly prices and annual financial statement are obtained from the database. The aim of the research on the valuation of the stock is to establish a correlation between accounting variables and market values (Muhammed, 2012).
Conclusion
In this research proposal, I focus much attention on the book value and stock market valuation of the earnings regarding international context. For example, accounting setting of Germany, United Kingdom, and France. Concentration is on accounting aspect that explains the book value and valuation earnings (Heitzman & Huang, 2018). The first accounting aspect is the degree of accounting conservatism and the relevance values of income statement versus the balance sheet (Ahmadi, 2017). The research also states that investigation on the value relevance of accounting reveals the effects of firm size and the mechanisms of corporate governance (Givoly, Hayn & Katz, 2017). It is expected that this proposal will validate that practical corporate governance norms are connected to better accounting information.
References
Ahmadi, A. (2017). The Stock Price Valuation of Earnings Per Share and Book Value: Evidence From Tunisian Firms. The Journal of Internet Banking and Commerce, 22(1), 1-11.
Alkali, M., Zuru, N., & Kegudu, D. (2018). Book value, earnings, dividends, and audit quality on the value relevance of accounting information among Nigerian listed firms. Accounting, 4(2), 73-82.
Ball, R., Gerakos, J. J., Linnainmaa, J. T., & Nikolaev, V. V. (2017). Earnings, retained earnings, and book-to-market in the cross section of expected returns.
Barth, M. E., & Landsman, W. R. (2018). Using Fair Value Earnings to Assess Firm Value.
Bhatia, M., & Mulenga, M. J. (2017). Value Relevance of Earnings and Book Value per Share: Comparative Study of Indian Public and Private Sector Banks.
Delkhosh, M., Malek, Z., Rahimi, M., & Farokhi, Z. (2017). A comparative study of information content of cash flow, cash value added, accounting earnings, and market value added to book value of total assets in evaluating the firm performance. International Journal of Accounting and Economics Studies, 5(2), 112-117.
Ferris, S. P., Hanousek, J., Shamshur, A., & Tresl, J. (2018). Asymmetries in the Firm’s use of debt to changing market values. Journal of Corporate Finance, 48, 542-555.
Givoly, D., Hayn, C., & Katz, S. (2017). The changing relevance of accounting information to debt holders over time. Review of Accounting Studies, 22(1), 64-108.
Heitzman, S., & Huang, M. (2018). Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits.
Hribar, P., Melessa, S., Mergenthaler, R., & Small, R. C. (2018). An Examination of the Relative Abilities of Earnings and Cash Flows to Explain Returns and Market Values.
Rabier, M. R. (2017). Value is in the eye of the beholder: The relative valuation roles of earnings and book value in merger pricing. The Accounting Review, 93(1), 335-362.
Zolotoy, L., Frederickson, J. R., & Lyon, J. D. (2017). Aggregate earnings and stock market returns: The good, the bad, and the state-dependent. Journal of Banking & Finance, 77, 157-175.
Pervan I., & Vasilj M. (2013). Value relevance of accounting information: Evidence from South Eastern European (SEE) countries. Economic research, (in print) Indexing: Web of science-SSCI. file:///C:/Users/noahh/Downloads/Value_relevance_of_accounting_information_evidence_from_South_Eastern_European_countries.pdf
Muhammed S., M. (2012). Value Relevance of Accounting Information and Stock Market Vulnerability – A Study on Listed Companies in Dhaka Stock Exchange, in: International Journal of Research in Commerce and Management 3: 23-27. https://meritresearchjournals.org/bm/content/2013/December/Tharmila%20and%20Nimalathasan.pdf
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
