Valuation of loss firms in a knowledge-based economy

Abstract

Recent research in accounting has documented a substantial increase in the number of loss firms. Existing theories on the valuation of loss firms are based on adaptation/abandonment options or limited liability, assuming that these firms are operationally distressed. In this paper, we show that many loss firms do not fit this stereotype and identify the primary value drivers of this new type of loss firms. Our analysis helps resolve the puzzling negative relation between earnings and market value documented in prior research. Overall, our findings underscore the importance of ''hidden assets'' or intangibles in the study of loss firms.

Robustness of Judicial Decisions to Valuation‐Method Innovation: An Exploratory Empirical Study

“…Another contextual change in the last half century is an increase in the volatility of reported earnings (Wei and Zhang, 2006). The increased earnings volatility over the last fifty years could be due to the increasing frequency and magnitude of one‐time items for US firms (Collins et al, 1997), or the increasing frequency of accounting losses (Klein and Marquardt, 2006; and Darrough and Ye, 2007). Consequently, exclusive reliance on historical earnings could introduce excessive bias to the final valuation outcome of M&A litigation.…”

The Information Content of Tax Expense for Firms Reporting Losses

“…1 In particular, Hayn [1995] contends that losses are less informative than profits since, in the case of a loss, current earnings signal that future earnings will be low enough to make the liquidation option attractive. Building on Hayn [1995], recent research (Joos and Plesko [2005], Darrough and Ye [2007], Li [2011]) suggests that not all loss firms are financially or operationally distressed, and examines the financial statements of loss firms to more clearly distinguish between persistent and transitory losses 2 . For instance, Joos and Plesko [2005] provide evidence that a model based on factors related to the firm's business environment and operations can predict whether a current loss will persist.…”

IT Capability and a Firm's Ability to Recover from Losses: Evidence from the Economic Downturn of the Early 2000s

“…Systematic ITC firms excel on firm-specific abnormal earnings that are above and beyond industry level. Finally, our study contributes to the body of research on earnings persistence (Stigler 1963;Lev 1983;Baginski et al 1999;Asthana and Zhang 2006) and the growing accounting literature on losses (Givoly and Hayn 2000;Joos and Plesko 2005;Klein and Marquardt 2006;Darrough and Ye 2007;Li 2011) by pointing the way to more precise assessment of loss persistence. Prior research indicates that firms reporting losses are prevalent in the U.S. economy and that their numbers have been increasing, particularly during periods of economic downturn.…”