The relationship between the book value and the market value of companies has captivated investors, business managers and analysts alike. The business is expected to be worth as much as the assets it has are worth. As a consequence the investors intuitively expect that the market value of the company should be related with the book value as reflected by the accounting information presented by companies (Lawton and Jankowski, 2009). However the developments of stock markets and financial accounting have not always followed the same path. Financial accounting has been concerned with the development of information that communicates to the shareholders on the financial performance and the financial position of the company. On the other hand, stock market theory has developed in an attempt to develop models that would be used to predict stock prices to enable investors improve their returns. The relationship between accounting information and stock market theories and practice has therefore been marred by uncertainty and misunderstandings (Reilly and Brown, 2003).
The literature review therefore first introduces the research questions that guide the review then evaluates the definitions and meanings of the book value and the market value of shares. This provides a common understanding to the sections that follow which evaluate the findings of previous research on the relationship between book values and the market values of shares. Some of the research has focused generally on the usefulness of accounting information in the prediction of stock market prices.
The research questions are based on the objective of the research which is to establish the relationship between the book value of oil companies and the market values. To fulfil this purpose however many questions will need to be answered to test all the hypotheses formulated for the research. The subdivision of the questions is limited to the scope of the research and is only focused on describing the relationship between the book value and the market value of oil companies. The following are the research questions that will guide the research:
Is there a relationship between the book value of oil companies and the market value of the companies? This question focuses on identifying whether there is a relationship between the historical book values and the market price of oil companies.
What is the direction of the relationship between the book value and the market value of the oil companies? This question focuses on identifying whether the relationship between the book value and the market if it exists is positive or negative. The book value is taken to be the independent variable.
What is the strength of the relationship between the book value and the market value of oil companies? This question focuses on identifying the significance of the book value in determining the market value of oil companies. If the relationship is significant, it will imply that few other factors interfere with the relationship but if the relationship is not significant it will imply that many other factors interfere with the relationship.