Abstract
The purpose of this paper is to improve our understanding of the relationship between share price and accounting information. Much of the literature utilizes the earnings number to reflect firm value. However, the revenue number seems more relevant for high tech firms (Xu, Cai, & Leung, 2007), and cash flow figures are more informative for internet companies (Romanova, Helms, & Takeda, 2012). We build on this notion that share price may map out to different accounting numbers for different firms. We collect 629 accounting metrics for 3,365 firms in the U.S. and estimate their correlation with the firms’ share price. We analyze these correlations and find that many firms exhibit a low correlation between share price and earnings. Other accounting numbers are important for these firms, including book value of net assets, retained earnings, stock options, gain or loss items, special or non recurring items, and dividend rates. We are curious to learn what causes firms to anchor onto different metrics, therefore perform a cluster analysis to group similar firms together along three key accounting metrics. We examine the composition of each cluster and find that capital structure, dividend patterns, the persistence of operations, age, and industry can influence which accounting number is correlated with firm value. We encourage other researchers to continue this exploration as there are many interesting questions to answer.
Highlights
The investment community is always keen to assess firm value, and the accounting profession is often interested in how their numbers map out to this value
We examine the composition of each cluster and find that capital structure, dividend patterns, the persistence of operations, age, and industry can influence which accounting number is correlated with firm value
We explore the performance of accounting metrics across the four financial reporting quarters and find that earnings and dividends correlate with share price in quarters 1, 2, and 3 whereas non-recurring items are reflected in firm value in the fourth quarter
Summary
The investment community is always keen to assess firm value, and the accounting profession is often interested in how their numbers map out to this value. The most common proxy for firm value is share price, and the most common accounting metric related to it is the earnings number. Show that revenues-to-price is a better metric for high-tech firms. Romanova, Helms, and Takeda (2012) show that cash flows may be a stronger indicator of value for internet companies. Barth, Li, and McClure (2021) explore how share price is associated with various accounting amounts such as net income, book value of equity, intangible assets, growth opportunities, revenue, operating cash flows, special items, other comprehensive income, dividends, capital expenditures, cost of goods sold, total assets, and selling, general and administrative expenses.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Risk Governance and Control: Financial Markets and Institutions
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
