Valuation of Negative Earnings Firms

• Main Authors: Chen Yi-Cheng, 陳沂爭
• Other Authors: David M, Chen
• Format: Others
• Language: zh-TW
• Published: 2001
• Online Access: http://ndltd.ncl.edu.tw/handle/38402965903663954393

碩士 === 輔仁大學 === 金融研究所 === 89 === The number of loss firms is increasing in recent years. The stock prices of loss firms are going down reflecting difficulties in transforming traditional industries to become globally competitive. This paper addresses the issue of valuing loss firms by accounting valuation models. First, we divide all Taiwan Stock Exchange listed companies into two groups based on whether their earnings numbers are positive or negative, and estimate the value of firms by Ohlson’s valuation model. The conclusion shows that the value of firms with negative earnings cannot be reasonably explained by Ohlson’s valuation model. That is, the value of negative earnings firms cannot be accounted for by the two most important accounting variables─earnings and the book value of equity. This paper then focuses on the two most severely depressed industries, banking and construction, for further analysis. We use an adjusted version of Ohlson’s valuation model by replacing the book value of equity with what we considered the most valuation relevant financial variables of the two industries. The empirical results show that earnings, inventories, and interest bearing debts are relevant information for valuing the construction industry. In addition, fees, collateralized loans, unsecured loans, non-performance loans, and allowance for non-performance loans are relevant information for valuing the banking industry. As a result, we conclude that information contained in the balance sheet is indeed relevant in firm valuation and the relative importance of various balance sheet items varies across industries.