The analysis of influence of book value and earnings on market value of Russian traded companies with different growth potential

Abstract

Goal: to prove that the explanatory power of book value and earnings in explaining market value varies across Russian firms with different growth potential. Objectives: 1. To conduct regression analysis of the basic model which assumes the relationship between market value and accounting indicators is constant. 2. To conduct regression analysis of the Growth Based Model which assumes the relationship between market value and accounting indicators varies across the groups with different growth potential. 3. To compare the two models in terms of their accuracy. 4. To estimate the expansion and abandonment options for the companies from the different growth potential groups. Key results: There is a relationship between capitalization, net income and book value on Russian market. The non-linear equity valuation hypothesis was proved and approximated with the piece-wise linear Growth Based Model: is company’s market capitalization as for the year-end, stands for company’s net income as for the year-end, BV is company’s book value as for beginning of the year, Subscripts l, m, h indicate low, medium and high growth potential groups respectively The Growth Based Model is more accurate in prediction of market value than basic model which is built on the whole sample. In the option-style valuation model proposed by Zhang and estimated for 3 representatives of the growth potential groups, the option to abandon constitutes the greatest part of low potential firm’s value; the value of maintaining operations at the current level constitutes the greatest part of medium potential firm’s value; and non-zero option to expand operations was estimated for a high growth potential company.