NEGATIVE BOOK VALUE FIRMS AND THEIR VALUATION

Negative Book Value Firms and Their Valuation

Table of Contents

Importance of the Research Questions3

Theoretical Underpinnings3

Hypotheses4

Research Methodology4

Dependent and Independent Variables4

Other Variables4

Statistical Analysis4

Key Findings and Implications5

Limitations5

Opportunities for Future Research5

Any Possible Implication6

Critique of the Article6

Negative Book Value Firms and Their Valuation

Importance of the Research Questions

The study that is “Negative Book Value Firms and Their Valuation” focuses on the concern that the due to the trend of increasing negative earnings, there is high rate of recurrence of negative book value of equity. It is observed that firms face financial instability or distress, if the book value of the firm is in negative, the reason of such financial instability is that the book value is considered as the key factor that is important to consider while making any business decisions. Moreover, the impact of negative earnings which is considered as an imperative element for the negative book value is difficult to minimize as from the past studies, it is observed that the book value is dependent on earnings of the firms. The research questions of the study focuses on the concerns that are the trend of increasing negative earnings in income statements and the occurrence of negative book value of equity from the period under considerations that is from 1976 to 2005, particularly the firms that report losses. For that reason, it is important to study the factors that affect the book value of firms.



Theoretical Underpinnings

The association between market value of loss firms and their income level find that, contrasting to firms that make profit, the correlation between the two variables is negative which shows inverse correlation (Jan and Ou, 1995). According to the past researchers, the book value is a dominant explanatory variable for market value in the cases when income level is negative; the book value is a valuation in the context of the evaluation of company or individual assets.

Past researchers explains that the negative coefficient on earnings for loss firms results from misspecification in the simple capitalization model of earnings. In addition to this, subsequent to together with book value in the valuation model, the concern of negative income level coefficient is eliminated. In addition to this, in relation to the valuation of loss firms and role of research and development, past study shows the loss reversal model to categorize losses into transitory and constant losses; it is observed that constant losses are associated with the high returns on stock. However, more analysis reflects that the high returns take place only for constant losses that involve research and development (Joos and Plesko, 2005).

Furthermore, the concept of valuation of firms is based on the idea that it is possible to optimize the performance of the company in an approach to management of financial performance. The company performance shows the better competitiveness, but also results in a breakdown of this performance. This distribution is important, because optimizing the company is also improving social cohesion that includes corporate governance which is ultimately an intangible capital which is an ...