Analysis of Book Value and Earnings Valuation in Accounting Research

This research proposal investigates the significance of book value and earnings valuation within the framework of contemporary accounting. It examines these variables in the context of accounting systems in France, Germany, and the U.K., emphasizing their role in stock market valuation and deci...Read More

Running head: CONTEMPORARY ACCOUNTING ISSUES 1
Contemporary Accounting Issues
Name
Institution

CONTEMPORARY ACCOUNTING ISSUES 2
CONTEMPORARY ACCOUNTING ISSUES
ACKNOWLEDGEMENT
This research proposal is successful due to overwhelming support from the school
administration. I am thankful to my colleagues who helped me complete the project. I especially
thank the Lecturers for the provision of expertise and insight that helped the research process. I
am thankful to everyone who supported me during the project either directly or indirectly. Your
professional advice and guidance taught me a real-life situation and scientific research. I would
also like to give thanks to my supervisors who helped me with varied encouragement and
information. You supported me during the hardest time. Lastly, I confirm that I have keenly
monitored and taken into consideration the University misconduct policy. I acknowledge the
importance of quotation marks, sources of ideas and references when quoting someone else’s
work.

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INTRODUCTION
This research proposal aims at studying book value and valuation of earnings. This topic
plays a core role in recent empirical financial and theoretical accounting research. Both book
value and earnings are core variables in the model of theoretical accounting valuation. This
research proposal investigates the valuation functions of book value and earnings from the
perspective of intercontinental accounting systems of France, Germany, and the U.K. There is a
need to price the items of financial statement in the form of predicted and valuation equation.
Nevertheless, the confirmation of value relevance of accounting info is to check the reliability
and validity of financial statement prepared by the company. It explains that accounting variables
are important when related to data used by various financiers in calculating share prices.
The hypotheses of this study established based on accounting aspects that highlight book
value and valuation of earnings: 1) the extent of accounting conservatism, and 2) the actual value
significant of an income statement and balance sheet information. This paper examines them in
the context of the system of accounting of France, Germany, and U.K. The paper is arranged as
follows: Part one presents the motivation. The second part discusses literature review. The third
part offers the Research method. The fourth part is the conclusion followed by list of reference.
Practical Motivation
The issue is essential to accountant, managers, public and regulators because it provides
information concerning stock market efficiency. The data collected by both parties can be used
for the decision-making process (Pervan & Vasilj 2013). The investors can also use the stock
market valuation of earning in the calculation of the present and future share prices. Thus,
investors can decide whether to invest in specific investments based on the profitability of the

CONTEMPORARY ACCOUNTING ISSUES 4
business opportunity. Managers are also capable of measuring the economic events of the
organization as defined in the accounting regulation.
Theoretical Motivation
Conservatism in financial reporting is significant in that it acts as the firm’s efficient
technologies used in the governance process. The theoretical basis of this study embraces a
measurement approach that encompasses financial reporting reasoning and contextual
accounting. It also entail a valuation that enables the researcher and users of accounting
information to help in forecasting how different information component and accounting variables
describe the market value. The valuation theory can also assist in structuring necessary analysis
(Rabier, 2017). It enables the researcher to detect various attributes to concentrate on any task
that is vital to valuation. Most of the recent value research derives from the known theories of
valuation. Such a valuation theory is no extraordinary as the research proposal indirectly and
directly, depends on the book value and the stock market valuation.
LITERATURE REVIEW
Existing literature on empirical evidence on the importance of accounting information
originates from the U.K Market. The value importance of earnings on a stock return for a
specified time from have been investigated. The studies have discovered that the business
earnings are positively correlated to the stock return. Nevertheless, when combined data of the
firm’s profit are taken into consideration, the movements of stock are closely connected to
returns (Barth & Landsman, 2018). Most of the studies have discovered that both book value and
earnings considerably depend on the market value. Other studies have found that explanatory
power of book value and earnings variables systematically vary across industries (Zolotoy,
Frederickson & Lyon, 2017).

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Research works of different authors have explored the unusual relationship between
accounting variables and share prices by use of data from Germany, United Kingdom, and
France. The joint explanatory power of 3 variables is approximately 60% (France), 70% (United
Kingdom) and 40% (Germany). They also enlighten through their finding that explanatory
control of both the variables differ regarding the accounting systems within the three countries.
The book value gives more details of earnings in France and Germany as compared to earnings
in the United Kingdom (Bhatia & Mulenga, 2017). Another study conducted by Graham on
international accounting differences and inspected value relevance, current residual income and
book value regarding shares. The Graham study revealed that the variable’s coefficients are
statistically significant for all the three countries (Carpenter & Whitelaw, 2017).
The value importance of book value, earnings and the actual return on equity regarding
share prices have also been investigated. There was an application of time series cross-sectional
and cross-sectional regression for the analysis of the data. The study discovered that return on
equity, book value and earnings have significant positive value on the securities of the market
value (Delkhosh, Malek, Rahimi & Farokhi, 2017). The conservatism differences in the
accounting system in France, U.K, and Germany have been studied. The hypothesis envisaged
that regression of book value and price on earnings should have the coefficient being much more
significant in France and Germany than in U.K (Alkali, Zuru & Kegudu, 2018).
Hypotheses
In this study, the core theme is the book value and valuation of earnings. The rule of
accounting system in the world requires organization’s financial statements to combine both the
income statement and the balance sheet (Hribar, Melessa, Mergenthaler & Small, 2018). The
hypotheses are:

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Hypothesis 1: The accounting info represents a determinant which affects stock price valuation
of companies in capital market
H1a: The stock price valuations is directly related to the earnings per share
H2b: The stock price valuation is directly related to book value per share
Hypothesis 2: Book value is increasingly value relevant than earnings per share in stock price
valuation
Hypothesis 3: The relevance of book values and earnings declines when companies have adverse
earnings.
RESEARCH METHOD
In this part, I explain the statistical test that I will perform to determine the prediction
outlined in the hypotheses. The experiments concentrate mostly on the book value, the power of
earnings and the coefficient of book value and earnings. The actual data from the German,
France and United States are derived from the database of Global Vantage Industrial
Commercial (Ball, Gerakos, Linnainmaa & Nikolaev, 2017). The monthly prices and annual
financial statement are obtained from the database. The aim of the research on the valuation of
the stock is to establish a correlation between accounting variables and market values
(Muhammed, 2012).
CONCLUSION
In this research proposal, I focus much attention on the book value and stock market
valuation of the earnings regarding international context. For example, accounting setting of
Germany, United Kingdom, and France. Concentration is on accounting aspect that explains the
book value and valuation earnings (Heitzman & Huang, 2018). The first accounting aspect is the
degree of accounting conservatism and the relevance values of income statement versus the

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balance sheet (Ahmadi, 2017). The research also states that investigation on the value relevance
of accounting reveals the effects of firm size and the mechanisms of corporate governance
(Givoly, Hayn & Katz, 2017). It is expected that this proposal will validate that practical
corporate governance norms are connected to better accounting information.

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REFERENCES
Ahmadi, A. (2017). The Stock Price Valuation of Earnings Per Share and Book Value: Evidence
From Tunisian Firms. The Journal of Internet Banking and Commerce, 22(1), 1-11.
Alkali, M., Zuru, N., & Kegudu, D. (2018). Book value, earnings, dividends, and audit quality on
the value relevance of accounting information among Nigerian listed
firms. Accounting, 4(2), 73-82.
Ball, R., Gerakos, J. J., Linnainmaa, J. T., & Nikolaev, V. V. (2017). Earnings, retained earnings,
and book-to-market in the cross section of expected returns.
Barth, M. E., & Landsman, W. R. (2018). Using Fair Value Earnings to Assess Firm Value.
Bhatia, M., & Mulenga, M. J. (2017). Value Relevance of Earnings and Book Value per Share:
Comparative Study of Indian Public and Private Sector Banks.
Delkhosh, M., Malek, Z., Rahimi, M., & Farokhi, Z. (2017). A comparative study of information
content of cash flow, cash value added, accounting earnings, and market value added to
book value of total assets in evaluating the firm performance. International Journal of
Accounting and Economics Studies, 5(2), 112-117.
Ferris, S. P., Hanousek, J., Shamshur, A., & Tresl, J. (2018). Asymmetries in the Firm's use of
debt to changing market values. Journal of Corporate Finance, 48, 542-555.
Givoly, D., Hayn, C., & Katz, S. (2017). The changing relevance of accounting information to
debt holders over time. Review of Accounting Studies, 22(1), 64-108.
Heitzman, S., & Huang, M. (2018). Internal Information Quality and the Sensitivity of
Investment to Market Prices and Accounting Profits.

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Hribar, P., Melessa, S., Mergenthaler, R., & Small, R. C. (2018). An Examination of the Relative
Abilities of Earnings and Cash Flows to Explain Returns and Market Values.
Rabier, M. R. (2017). Value is in the eye of the beholder: The relative valuation roles of earnings
and book value in merger pricing. The Accounting Review, 93(1), 335-362.
Zolotoy, L., Frederickson, J. R., & Lyon, J. D. (2017). Aggregate earnings and stock market
returns: The good, the bad, and the state-dependent. Journal of Banking & Finance, 77,
157-175.
Pervan I., & Vasilj M. (2013). Value relevance of accounting information: Evidence from South
Eastern European (SEE) countries. Economic research, (in print) Indexing: Web of
science-SSCI.
file:///C:/Users/noahh/Downloads/Value_relevance_of_accounting_information_evidence
_from_South_Eastern_European_countries.pdf
Muhammed S., M. (2012). Value Relevance of Accounting Information and Stock Market
Vulnerability – A Study on Listed Companies in Dhaka Stock Exchange, in: International
Journal of Research in Commerce and Management 3: 23-27.
http://meritresearchjournals.org/bm/content/2013/December/Tharmila%20and
%20Nimalathasan.pdf

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Appendix
Autho
r
Date Title Jour
nal
Type of
paper
(Theoretic
al/Empiric
al )
If
Empirical
,
Research
method
and
Sample
If
empirica
l,
Depende
nt and
indepen
dent
variable
100 words summary contribution to research question
Ahmad
i, A.
2017 The Stock Price
Valuation of
Earnings Per
Share and Book
Value: Evidence
From Tunisian
Firms
The
Journ
al of
Intern
et
Banki
ng
and
Com
merce
Empirical Sample:
28 non-
financial
firms from
Tunisia
Methodol
ogy:
Survey
Dep:
stock
price
valuation
Indepe:
book
value per
share
This study will greatly contribute to my research question.
This is because it already examined the value relevance of
accounting info which I intend to explore to determine
whether some accounting variables enjoys the ability to
explicate the stock price valuation. Moreover, I will be able
to borrow from the research design (Ohlson Price Model)
employed in this study to present an effective regressions
outcome. Also, I will use the outcome of the investigations
of the value relevance of accounting info already done in this
paper to develop my current study. The strong evidence
provided in this study to value relevance accounting info in
price model valuation of companies will help me answer my
research questions effectively.
Delkho
sh et
al.
2017 A comparative
study of
information
content of cash
flow, cash value
added,
accounting
earnings, and
market value
added to book
value of total
assets in
evaluating the
firm
performance.
Intern
ation
al
Journ
al of
Accou
nting
and
Econ
omics
Studie
s
Empirical Sample:
122
companies
listed in
Tehran
Stock
Exchange
in 2009-
2014
Method:
Descriptiv
e
Scientific
study
Dep:
Firms
performa
nce
Indep:
book
value of
total
assets
The study is significant in helping me complete my project.
From this study, I will be to get the answers to my research
since, it has given me effective methods of analyzing data to
understand my research questions. For example, I will be
able to use the descriptive study that applied regression
analysis to test the relationship between variables. This will
help get to determine the direction of the relationship
between the variable thus answering my research
question/hypotheses effectively.
Rabier,
M. R.
2017 Value is in the
eye of the
beholder: The
relative valuation
roles of earnings
and book value
in merger
pricing.
The
Acco
untin
g
Revi
ew
Theoretical N/A N/A The study is important in helping complete my project. The
study has undertaken a wider theoretical accounting review.
This has provided detailed information on understanding the
book value and the value relevance of accounting info. Thus,
by using this detailed information presented in the study, I
will be able to get answers to my research questions. This
will help to indicate the value relevance based on the
statistical association between accounting and financial data
and return or prices. Thus, I will use the accounting data and
value to provide info regarding firms’ economy to various
users and stakeholders of accounting information. I will thus
take the market price as dependent variable measurement
and value and accounting information as independent
variable to help answer my research question.

CONTEMPORARY ACCOUNTING ISSUES 11
Pervan
&
Vasil
Value relevance
of accounting
information:
Evidence from
South Eastern
European (SEE)
countries
Econ
omic
resear
ch
Empirical Sample:
97
corporatio
ns listed
on capital
market
Method:
Survey
Dep:
Share
price at
end of
fiscal
year
Indep:
EPS,
book
value,
other
value
relevant
info
The study is significance in my current study because It has
examined the same questions I intend to cover. This is
because the hypothesis focused on the analysis of connection
between share prices and accounting info on capital markets.
Thus, I will be able to test my hypotheses in the same
manner these have been tested. For example, testing of
hypothesis will proceed the expression of share market value
as a function of book value and earning and based on Ohlson
Model. This will help me easily determine the correlation
between share prices alongside accounting variables.
Muha
mmed
2012 Value Relevance
of Accounting
Information and
Stock Market
Vulnerability –
A Study on
Listed
Companies in
Dhaka Stock
Exchange
Intern
ation
al
Journ
al of
Resea
rch in
Com
merce
and
Mana
geme
nt
Empirical Sample:
12
manufactu
ring
companies
listed in
Columbia
Exchange
Method:
Systemati
c review
Dep: The
value
relevance
of
accounti
ng info
Indep:
Market
vulnerabi
lity
The article is significance in my current study. This is
because, it has examined the influence of value relevance of
accounting info on market vulnerability of listed companies
(manufacturing) in Columbia stock exchange. I will employ
the same method of accounting based measure of market
vulnerability (measured by market price per share) used in
this study to complete my current project. The descriptive
and inferential statistics utilized in this study will form the
basis of study.

CONTEMPORARY ACCOUNTING ISSUES 12