Value relevance of book values, earnings, and future earnings: evidence by time, life cycle stage, and market uncertainty

Abstract

Purpose

The purpose of this study is to investigate the role of book values, earnings, and future earnings in equity valuation by time, life cycle stage, and market uncertainty using samples of USA and Japanese companies.

Design/methodology/approach

This study employs Lubberink and Willett (2021) methodology in using log-linear models to estimate the value relevance of accounting numbers and follows Schaberl (2016) approach to measure %incremental value relevance. The study also includes future earnings in a basic valuation model (Ohlson, 1995) to explore the extent to which stock prices are forward looking.

Findings

This study finds a significant increase by time in the relative value relevance of a combined model with book values and earnings and a combined model with future earnings for both countries. However, the incremental value relevance of book values, earnings, and future earnings remain stable over time. The results by life cycle stage indicate that incremental value relevance of future earnings and earnings are more (less) pronounced for firms in the intro (mature) life cycle stage while the incremental value relevance of book values is highest for firms in the decline stage for both countries. The results by market uncertainty indicate that firms with high market uncertainty display higher incremental value relevance of book values for both countries. The results on future earnings are mixed as USA (Japan) firms with high (low) market uncertainty display more (less) incremental value relevance of future earnings.

Practical implications

The findings in this study enhance the merits of two basic financial statements (balance sheet and income statement) in a firm's equity valuation for potential investors and existing shareholders and document an additional role of future earnings information in reflecting a firm's stock price, which is beyond what book values and current earnings have already contributed.

Originality/value

This is the first study that uses log-linear models to estimate the value relevance of accounting numbers and investigates value relevance of accounting information in three views: time, life cycle stage, and market uncertainty.

Citation

Boonlert-U-Thai, K. and Schaberl, P. (2022), "Value relevance of book values, earnings, and future earnings: evidence by time, life cycle stage, and market uncertainty", Asian Review of Accounting, Vol. 30 No. 5, pp. 648-668. https://doi.org/10.1108/ARA-03-2022-0070