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Earnings Momentum, Adaptation Value, and Nonlinearities in the Valuation of Chinese Equity Stocks

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  • Yizhe Dong
  • Martien Lubberink
  • Diandian MA
  • Mark Tippett

Abstract

We demonstrate that when the variables comprising a firm's investment opportunity set depend on their past values then the present value of the cash flows the firm expects to earn will be stated in terms of the levels and the momentum of the affected variables. It is also shown that the market value of a firm's equity is comprised of the present value of the cash flows it expects to earn from operating under its existing investment opportunity set plus the value of the real options the firm possesses to modify or even completely change its existing investment opportunity set. Our empirical analysis, based on both Chinese and US data, shows that earnings momentum and the adaptation and growth options typically available to firms all appear to have a significant impact on equity prices.

Suggested Citation

  • Yizhe Dong & Martien Lubberink & Diandian MA & Mark Tippett, 2019. "Earnings Momentum, Adaptation Value, and Nonlinearities in the Valuation of Chinese Equity Stocks," Abacus, Accounting Foundation, University of Sydney, vol. 55(2), pages 333-361, June.
    • Handle: RePEc:bla:abacus:v:55:y:2019:i:2:p:333-361
    DOI: 10.1111/abac.12145
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    Cited by:

    1. Simarjeet Singh & Nidhi Walia & Sivagandhi Saravanan & Preeti Jain & Avtar Singh & Jinesh jain, 2021. "Mapping the scientific research on alternative momentum investing: a bibliometric analysis," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 38(4), pages 619-636, April.

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