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The Transitory Nature of Negative Earnings and the Implications for Earnings Prediction and Stock Valuation

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  • Jenkins, David S

Abstract

The value-irrelevance of losses largely results from the transitory nature of losses and the diminished relationship between current and future earnings. This study develops a sales-based model of future normal earnings that is useful in analyzing future earnings prospects of loss firms. Results indicate that the developed model is associated with future earnings realizations and current stock price and is shown to be incrementally value-relevant (with book value) in price regressions for loss firms. Investigation of the relative valuation role of the prediction model provides evidence that the model is associated with equity value for loss firms expected to survive. Copyright 2003 by Kluwer Academic Publishers

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  • Jenkins, David S, 2003. "The Transitory Nature of Negative Earnings and the Implications for Earnings Prediction and Stock Valuation," Review of Quantitative Finance and Accounting, Springer, vol. 21(4), pages 379-404, December.
    • Handle: RePEc:kap:rqfnac:v:21:y:2003:i:4:p:379-404
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    Cited by:

    1. Matthias Demmer & Paul Pronobis & Teri Lombardi Yohn, 2019. "Mandatory IFRS adoption and analyst forecast accuracy: the role of financial statement-based forecasts and analyst characteristics," Review of Accounting Studies, Springer, vol. 24(3), pages 1022-1065, September.
    2. Wu, Hai & Fargher, Neil & Wright, Sue, 2010. "Accounting for investments and the relevance of losses to firm value," The International Journal of Accounting, Elsevier, vol. 45(1), pages 104-127, March.

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