The Transitory Nature of Negative Earnings and the Implications for Earnings Prediction and Stock Valuation

Author: Jenkins D.S.

Source: Review of Quantitative Finance and Accounting, Volume 21, Number 4, 200312 , pp. 379-404(26)

Publisher: Springer

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Abstract:

The value-irrelevance of losses largely results from the transitory nature of losses and the diminished relationship between current and future earnings. This study develops a sales-based model of future normal earnings that is useful in analyzing future earnings prospects of loss firms. Results indicate that the developed model is associated with future earnings realizations and current stock price and is shown to be incrementally value-relevant (with book value) in price regressions for loss firms. Investigation of the relative valuation role of the prediction model provides evidence that the model is associated with equity value for loss firms expected to survive.

Keywords: valuation; profitability; sales; negative earnings; bankruptcy

Document Type: Research article

Affiliations: 1: Department of Accounting and MIS, Lerner College of Business and Economics, University of Delaware, Newark, DE 19716, USA Tel.: (302) 831-6823., Email: jenkinsd@lerner.udel.edu

Publication date: 2003-01-01