Fundamental Valuation in Six Asian Countries: Role of Earnings, Book Value, Residual Income, and Dividend

• In Event: Potpourri Dialogue Session
  In Dialogue Session: Potpourri Dialog Session

Abstract

This study examines the value relevance of earnings, book value, residual income, and dividend for listed firms in six Asian countries that base their accounting standards on International Financial Reporting Standards (IFRs). We first compare three basic accounting based valuation models: earnings capitalization; book value; residual income and find that the residual income model performs best in all countries. Secondly, we analytically derive and use another specification of the Ohlson model (called Ohlson with other information) where dividend play the role of other information. This specification would be appropriate in countries where there are no other formal sources of “other information” such as analyst forecasts as has been used extensively in the literature. We find that this modified Ohlson model performs best as compared to the residual income and basic Ohlson models. Our results suggest its positive information role of dividend over and beyond its wealth effects. Lastly, we show the effect of the financial crisis in 1997 on value relevance and coefficient estimates of earnings, book value, residual income, and dividend. The results show an increase in value relevance of book value and a decrease in value relevance of other variables in most countries. The results of coefficient estimates are strong for earnings and book value, showing declining values of earnings for Indonesia, Malaysia, and Thailand, increasing values of earnings for Singapore, Hong Kong, and Korea, and declining values of book value for all countries except Singapore and Korea.

Author

• Pradyot K Sen, University of Washington, Bothell