The Role and the Relative Importance of Financial Statements in Equity Valuation

Abstract

Earnings, book value, dividends and other financial statement variables have been used in theoretical and empirical research as important factors in models of equity valuation. Similarly, courts of law have relied on financial variables in determining equity values of private firms. Our focus is on determining the robustness and relative rankings of these valuation models and to test the relative importance of the financial statement variables in explaining equity valuation. Our results indicate that book value and earnings related variables are the most important variables for Canadian equity valuation. In addition, dividend levels are found to be relevant in equity valuation; and valuation formulas that incorporate industry relatives, such as certain court accepted models, perform well.