The roles of accounting data in equity valuation: evidence from China

Abstract

Purpose – The purpose of this paper is to examine the roles of earnings and book value (BV) in equity valuation. Design/methodology/approach – The authors apply model’s explanatory power to analyze the roles of accounting data and test the hypotheses empirically with a sample of Chinese listed companies between 2004 and 2010. Findings – The authors find that impact of accounting data on equity value is also dependent on profitability, but the behavior is non-monotonic. In the intermediate-profitability range, explanatory power of both earnings capitalization model and balance sheet model reach the peak, there are no significant differences between them. In the low-profitability range (small or negative profitability), explanatory power of balance sheet model is larger than earnings capitalization model. In the high-profitability range, explanatory power of balance sheet model is less than earnings capitalization model. Research limitations/implications – The results support that the role of BV is more stable in equity valuation. Moreover, this outcome provides reference for improving existing valuation model and setting accounting standard, and provides some empirical evidence for the practical application of BV in equity valuation. Originality/value – Existing studies treat earnings as main variable of equity valuation, and BV is only added as a supplement. This paper compares roles of accounting earnings and BV in equity valuation, especially investigates the influence of BV in equity valuation, and fills up the deficiency in the related literature.