The effects of book value, net earnings and cash flow on stock price

Makrani, Khosro Faghani; Abdi, Mohammad Reza

doi:10.5267/j.msl.2014.8.005

Cited by 9 publications

(7 citation statements)

References 11 publications

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“…A similar predicament, encountered in the results of the Makrani and Abdi (2014) study, was that a negative coefficient was obtained for the earnings variable throughout the annual crosssectional regressions they reported, except for one year. This finding is puzzling because it is inconsistent with the vast majority of related prior evidence regarding the positive effect of an increase in the earnings variable on equity share prices.…”

Section: Challenges and Weaknessessupporting

confidence: 67%

“…b) Pooled cross-sectional linear regression models were often used without a clear demonstration of how the econometric assumptions of poolability underlying such models were satisfied, namely those of the homogenous slope coefficients. In the current literature survey, this challenge was found to be the case in respect of several studies, such as Eng et al Makrani and Abdi (2014), Alkali et al (2018), Bepari (2015), Ratnaningrum and Widagdo (2019), Murwaningsari et al (2015), Ahmadi and Bouri (2018), Kadri (2016), Dan et al (2011), insufficient information was provided regarding how the assumptions of their modelling specifications were met.…”

Section: Challenges and Weaknessesmentioning

confidence: 91%

“…Al-Hares et al (2012), Bawono, Ramadhanti and Kurniawati (2020); Makrani and Abdi (2014), and Alkali, Kegudu and Zuru (2018) examined the specification of other non-accrual, cash-based variables such as dividends distributions and operational cash flows in addition to the earnings and equity book value variables. Their collective evidence demonstrated a significant association of accounting information with equity share prices when cash flows or dividends were specified as explanatory variables in the Ohlson (1995) model or the Collins et al (1997) variant.…”

Section: Summationmentioning

confidence: 99%

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The explanatory value of intrinsic equity valuation models for share price variations: A survey of recent approaches

2023

ISEA

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Over the past six decades, a considerable amount of research has been conducted to better understand the explanatory ability of intrinsic equity valuation models to account for variations in equity share prices or returns, in which the accounting-based Ohlson residual income valuation framework has been the primary focus. Meanwhile, several variants of this model have emerged, the foremost of which typically comprises the decomposition of the Ohlson residual income variable into substitute accounting earnings variables, such as the traditional bottom-line earnings variable or, more recently, alternative earnings performance measures, of which earnings before interest, tax, depreciation and amortisation (EBITDA) is a particular case in point. However, there appears to be a lack of consensus about the variables of interest and the most appropriate model to define the predicted interconnections between accounting values and share prices or share price returns. In light of this lack of accord, the aim of this study was to examine the recent literature with regard to the approaches and evidence pertaining to the Ohlson model and the recent variants thereof that are based either on traditional or alternative earnings performance measures, with a view to answering the following research questions: 1. Which econometric model results in the best explanation of the association between accounting information and share prices? 2. Consequently, which variable, when combined with equity book values, seems to provide the most persuasive evidence of association with equity share prices: EBITDA, earnings or residual income? To answer these questions, a systematic literature review was conducted. The criteria were that the studies had to have at least two explanatory variables of interest in accounting for share price variations or returns, with one of them being equity book values and the other being any earnings performance measure, such as residual income, earnings, EBITDA, or combinations involving transformations of these. The review entailed a critical evaluation of the methodologies, model specification and model output against the reported findings, inferences and conclusions. The results revealed that the original Ohlson (1995) model, the Collins et al. (1997) and the recent EBITDA variations yielded equally valid demonstrations of the association of accounting information with share price variations. Consequently, depending on the choice of model, all three variables, EBITDA, earnings and residual income, appear to possess an equal amount of explanatory power to account for variations in equity share prices. The study's major contribution is to clarify the explanatory power of Ohlson-based models and the specification of variables, as well as methodological and analysis issues that could inform future research in the field.

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Section: Challenges and Weaknessessupporting

confidence: 67%

Section: Challenges and Weaknessesmentioning

confidence: 91%

Section: Summationmentioning

confidence: 99%

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The explanatory value of intrinsic equity valuation models for share price variations: A survey of recent approaches

2023

ISEA

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“…Furthermore, Abul (2019: 27) conducted research on the factors influencing the behavior of individual stock investors on the Kuwait Stock Exchange (KSE) and found that overconfidence, risk perception, and herd behavior had an impact on the choices made by KSE individual investors. Makrani & Abdi (2014: 2131 examined the effects of net earnings, cash flow, and book value on the individual stock investor's behavior on the Tehran Stock Exchange (TSE) from 2008 to 2013. The effects of book value are higher than those of cash flow and net earnings on the behavior of TSE individual investors in Iran.…”

Section: Related Empirical Literature About the Developing Countriesmentioning

confidence: 99%

An Analysis of Individual Investors’ Behavior: A Case of the Dhaka Stock Exchange

HASNAT,

DAĞLI,

KURTARAN

2023

Uluslararası İktisadi Ve İdari İncelemeler Dergisi

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The objective of this research is to ascertain the factors associated with financial indicators, independent sources of information, financial necessities, advocate recommendations, and personal reputation/firm reputation compliance that can influence the behavior of the Dhaka Stock Exchange (DSE) individual investors. The research was carried out by questionnaire method. The survey was conducted with 300 investors trading on DSE. The survey includes only gender as a demographic factor of the participants, 5 main variables, and 27 sub-factors related to them. The obtained data were analyzed with SPSS 26 program. In the research, descriptive analysis was used to achieve the research objective. The findings of the research present that financial indicators, independent sources of information, and personal reputation/firm reputation compliance have a significant impact while financial necessities have a moderate impact, and advocate recommendations have very little impact on DSE individual investors’ behavior. The research provides guidance to individual investors, firms, policymakers, and investment advisors.

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“…Here, net income had a higher value relevance than book value and cash flows. Moreover, the research results of Faghani Makrani and Abdi (2014) showed that the effect of book value, net income, and cash flow decreased from 2007 to 2012. Also, book value had greater value relevance than net income and cash flow.…”

Section: Introductionmentioning

confidence: 99%

Relevance of Earnings Value, Book Value, and Operating Cash Flow in Manufacturing Companies in Indonesia

Puspa

Nazaruddin

et al. 2022

JAI

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Research aims: This study examines the value relevance of accounting information consisting of earnings information, book values, and operating cash flows after Indonesia uses the full convergence of IFRS Financial Accounting Standards.Design/Methodology/Approach: The value relevance test was conducted using Ohlson's (1995) pricing model and Easton and Harris' (1991) return model. The valuation model test employed two regression equations, i.e., testing the relationship between earnings information and book value with stock prices and then testing the relationship between earnings information, book value, and cash flow with stock prices. In addition, the return model testing was performed to examine the relationship between earnings information and earnings changes with stock returns and the relationship between cash flow and cash flow changes with stock returns. The research sample was 105 manufacturing companies, with a research period from 2016 to 2019.Research findings: The test results with the pricing model approach revealed that earnings and cash flow had value relevance, while book value had no value relevance. This study’s results suggest that earnings and cash flow information are helpful for investors in making investment decisions. Moreover, the test results with the return model approach also uncovered those earnings, changes in earnings, and changes in operating cash flows had value relevance while operating cash flows, on the other hand, had no value relevance.Theoretical contribution/Originality: The utilized two models complement each other, and this study provides empirical evidence for standard setters who can renew beliefs about how much accounting information is reflected in stock prices in Indonesia, especially the manufacturing sector, after the full convergence of IFRS Financial Accounting Standards is applied.

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The effects of book value, net earnings and cash flow on stock price

Cited by 9 publications

References 11 publications

The explanatory value of intrinsic equity valuation models for share price variations: A survey of recent approaches

The explanatory value of intrinsic equity valuation models for share price variations: A survey of recent approaches

An Analysis of Individual Investors’ Behavior: A Case of the Dhaka Stock Exchange

Relevance of Earnings Value, Book Value, and Operating Cash Flow in Manufacturing Companies in Indonesia

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