Value relevance of negative earnings disaggregation: evidence from Indonesia

PurposeThis study examines the association of negative earnings disaggregation and growth to incrementally increase the low value relevance of loss-making firms on the Indonesian Stock Exchange (IDX).Design/methodology/approachUsing data from IDX-listed loss-making firms from 2017 to 2021, this study collected 652 firm-year observations and employed multiple linear regression analysis to test the hypothesis. The independent variables in this study are negative earnings, book value, comprehensive accruals, cash flow and growth. The dependent variable is stock price, while the control variable is industry type.FindingsThe results show that both negative earnings disaggregation and growth are able to increase the value relevance of losses. However, the incremental increase generated by growth is higher than negative earnings disaggregation for the loss-making firms.Research limitations/implicationsThe limitation of this study is in the sample selection criteria, which only uses nonfinancial IDX-listed loss firms with positive book values.Practical implicationsThe combination of book value and growth has a higher association with stock price than the combination of earnings and book value or book value and comprehensive accruals. Nevertheless, financial statements used in measuring book value, comprehensive accruals and growth have proven to be effective in the equity valuation of loss-making firms in Indonesia.Originality/valueOur study provides new empirical insights into the value relevance of loss-making firms, addressing the limitations of previous studies that focus solely on earnings and book value as the main variables. This study extends the previous model by incorporating the disaggregation of negative earnings into comprehensive accruals and growth derived from the implicit cost of capital (ICC), enhancing the low value relevance of earnings and book value in loss-making firms. Consequently, the study offers a comprehensive evaluation of the increased explanatory power of reported earnings, book value, comprehensive accruals and growth.