Thesis: Relationship between Assets and Earnings in the Past

Sample Thesis Paper

Ou and Penman (1989a) conducted a study that as aimed developing a model that would be used to predict the earnings of the company in the future based on the items found in the financial statements. The model was based on the relationships between assets and earnings in the past. The assumption was that the assets of a business determine the level of earnings that a company can be able to make and that earnings are the main determinants of the changes in the market value for the shares.  Using several items in the financial statements they were able to develop a model that predicted earnings in the future. Using the predicted earnings an investment policy was developed.  The investment policy developed was able to earn abnormal returns of about 8.3 % were made in the first year. What this study indicated is that the financial statements have relevance in the determinations of the market values of companies.  The study also indicated that earnings were important in the relationship between the book value of the company and the market value.

Ohlson (1995) who is one of the most important scholars in the area of the relationship between the financial statement data and the market values of companies developed a model to predict the market value of a share price on the basis of a linear function of the present value of expected dividends (PVED) and the clean surplus relation (CSR). Ohlson (1995) assumed that the value of a share incorporates the future information of the company as predicted by the present information in the company’s financial statements. The model identified a weak but significant relationship between the earnings predictions based on the assets of the company and other related factors. The findings indicate that the financial statements have information that can be used to predict the movement of stock market values. However the findings also indicated that the financial statements do not in any way contain all the information that is necessary for the prediction of stock market values.

Barth and Clinch (1998) sought to investigate the relationship between the book value of a company and the market of the company’s shares. They wanted their book value to be closest to the true value of the company as much as possible and as consequence they used the inclusive book value which combined both the tangible and the intangible assets of the company. Using a huge sample and data from many years they identified that the book value that included the intangible assets was strongly related with the market value and that the relationship was positive. The findings indicate that the book value has an impact on the market value of a company and that the intangible assets are also determinants of the market value. The inclusion of the intangible assets seems to indicate that the market is to some extent efficient and is bale to integrate even non financial information in the share prices.

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