Advertisement

Barriers in the Calculation of Residual Income in Slovak Companies

  • Ivana PodhorskaEmail author
  • Tomas Kliestik
Conference paper
Part of the Springer Proceedings in Business and Economics book series (SPBE)

Abstract

The question of the value of company and the value of company’s goodwill is an actual topic not only in Slovakia but also abroad. The often interest of scientific researchers is a difference between the market value of company and the book value of company. Because this difference is often a situation, which is created in real economic conditions. In general, scientific literature states the idea that difference between the market value of company and the book value of company represents relevant valuation for company’s goodwill. It means that company’s goodwill is the source of the market value of company creation. This paper deals with the issue of relevant valuation of company’s goodwill. This paper uses, as basic concept, the idea of residual income for valuation of the value of company and the value of company’s goodwill. According to the theory of residual income, residual income represents the value of income which company creates over the level of its cost of equity. Required income from the side of company’s owners represents basic normal income which the company had to create. Any income which the company creates over the level of its cost of equity represents residual income. Based on these facts, residual income is defined as a difference between net income and the equity charge. The concept of residual income uses, for example, Feltham-Ohlson model, which determines the value of company as the sum of the book value of company’s equity and the present value of its future residual income. Application of information from company’s financial statements represents the advantage of this model. The main aim of this paper is to calculate the value of company’s residual income (calculation consists of earnings after taxes, book value of equity, and the cost of equity). On these outputs, this paper determines other statistically significant variables, which could have impact on the value of company’s residual income. The secondary aim of this paper is to discover the statistically significant variables, which could be considered as the sources of company’s goodwill. This paper works with the data set of Slovak companies. The data set consists of 11,483 financial statements of Slovak companies. For calculation of earnings after taxes and the book value of equity, this paper uses information from financial statements of this data set of companies. For calculation of cost of equity, this paper uses the capital asset pricing model, according to the recommendation of Feltham-Ohlson model. Calculation of secondary variables, which could have impact on the company’s goodwill, is primary based on the information from financial statements of the data set of Slovak companies. This paper uses, as a relevant statistical method for determination of statistically significant variables, the multiple linear regression.

Keywords

Residual income Feltham-Ohlson model Equity Goodwill Multiple linear regression 

Notes

Acknowledgment

This research was financially supported by the Slovak Research and Development Agency—Grant No. APVV-14-0841: Comprehensive Prediction Model of the Financial Health of Slovak Companies.

References

  1. Ballaster, M., Garcia-ayuso, M., & Livnat, J. (2003). The economic value of the R&D intangible asset. European Accounting Review, 12(4), 605–633.CrossRefGoogle Scholar
  2. Bartosova, V., & Kral, P. (2016). Methodological framework of financial analysis results objectification in Slovak Republic. In The European Proceedings of Social & Behavioural Sciences EpSBS (pp. 2357–1330). Selangor.Google Scholar
  3. Cheng, Q. (2005). What determines residual income? The Accounting Review, 80, 85–112.CrossRefGoogle Scholar
  4. Collins, D. W., Maydew, E., & Weiss, I. (1997). Changes in the value-relevance of earnings and book values over the past forty year. Journal of Accounting and Economics, 24, 36–68.Google Scholar
  5. Corejova, T., & Al Kassiri, M. (2016). Knowledge triangle, innovation performance and global value chain. In 16th International Scientific Conference on Globalization and its Socio-Economic Consequences 2016 (pp. 329–336). Rajecke Teplice.Google Scholar
  6. Edwards, E. O., & Bell, P. W. (1961). The theory and measurement of business income. Berkeley, CA: University of California Press.Google Scholar
  7. Feltham, G., & Ohlson, J. A. (1995). Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 11(2), 689–731.CrossRefGoogle Scholar
  8. Jakubec, M., Kardoš, P., & Kubica, M. (2011). Riadenie hodnoty podniku – zbierka príkladov. Bratislava: Iura Edition, spol. s r.o., Slovak Republic.Google Scholar
  9. Jansky, M. (2011). The Feltham-Ohlson model: Goodwill and price volatility (Working Paper). Charles University in Prague, Czech Republic.Google Scholar
  10. Kariuki, B. W., et al. (2013). Testing the residual income valuation model in a Nascent stock exchange: The case of Nairobi securities exchange. International Journal of Business and Social Science, 4, 69–77.Google Scholar
  11. Kimbro, M. B., & Xu, D. (2016). The accounting treatment of goodwill, idiosyncratic risk, and market pricing. Journal of Accounting Auditing and Finance, 31, 365–387.CrossRefGoogle Scholar
  12. Kliestik, T., & Majerova, J. (2015). Selected issues of selection of significant variables in the prediction models. In Financial Management of Firms and Financial Institutions: 10th International Scientific Conference (pp. 537–543). Ostrava, Proceedings.Google Scholar
  13. Kliestik, T., Majerova, J., & Lyakin, A. N. (2015). Metamorphoses and semantics of corporate failures as a basal assumption of a well-founded prediction of a corporate financial health. In Economics and Social Science: 3rd International Conference on Economics and Social Science (pp. 150–154). Paris.Google Scholar
  14. Kliestikova, J., & Misankova, M. (2016). European insolvency law harmonisation in terms of global challenges. In Proceedings of International Scientific Conference Globalization and Its Socio-Economic Consequences 2016 (pp. 914–921). Rajecke Teplice, Slovakia.Google Scholar
  15. Liu, J., & Ohlson, A. J. (1999). The Feltham-Ohlson (1995) model: Empirical implications (Working Paper). Arizona State University and University of California at Los Angeles.Google Scholar
  16. Marik, M., Čada, K., Dušek, D., Maříková, P., Rýdlová, B., & Rajdl, J. (2011). Metody oceňování podniku. Praha: Ekopress, s.r.o.Google Scholar
  17. Ohlson, J. (1999). Discussion of an analysis of historical and future-oriented information in accounting-based security valuation models. Contemporary Accounting Research, 16(2), 381.CrossRefGoogle Scholar
  18. Peasnell, K. (1982). Some formal connections between economic values and yields and accounting numbers. Journal of Business Finance & Accounting, 9(3), 361–381.CrossRefGoogle Scholar
  19. Preinreich, G. (1936). The fair value and yield of common stock. The Accounting Review, 130–140.Google Scholar
  20. Spuchlakova, E., & Michalikova-Frajtova, K. (2016). Investment certificates as an instrument of structured products. Ekonomicko manažerské spektrum, 10(2), 13–25.Google Scholar
  21. Svabova, L., & Kral, P. (2016). Selection of predictors in bankruptcy prediction models for Slovak companies. In 10th International Scientific Conference International Days of Statistics and Economics (pp. 1759–1768). Prague.Google Scholar
  22. Vochozka, M. (2010). Development of methods for comprehensive evaluation of business performance. Politicka ekonomie, 58(5), 675–688.CrossRefGoogle Scholar
  23. Zelenka, V. (2006). Goodwill principy vykazování v podniku. Praha: Ekopress, s.r.o.Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.Faculty of Operation and Economics of Transport and Communications, Department of EconomicsUniversity of ZilinaZilinaSlovak Republic

Personalised recommendations