Abstract
This chapter evaluates and critiques existing valuation research within the ROM framework. The literature on accounting-based valuation has been heavily dominated by empirical work, with discoveries of empirical relations coming long before the development of theoretical models. In the absence of formal models explaining how equity value should be related to reported accounting data, researchers have relied on economic intuition and valuation theories drawn from other disciplines (finance and economics) in order to design research studies and interpret their results. The purpose of this chapter is twofold. Firstly, we demonstrate that many of the salient empirical findings documented in the literature can be reconciled with the ROM and indeed are different manifestations of it. Secondly, we explain, in the context of the ROM, how the empirical valuation models used in the literature may have been misspecified.
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Notes
- 1.
The negative slope found by BD for firms with low scaled earnings appears to be a result specific to their sample and design of their regression equation. As shown in Chap. 5 based on a different sample, the slope of the V–X relation is positive, albeit small in magnitude, for firms in low profitability regions when the sample is partitioned into B-deciles (as a way to control for book value).
- 2.
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Zhang, G. (2014). Casting Theoretical Light on the Empirical Valuation Literature. In: Accounting Information and Equity Valuation. Springer Series in Accounting Scholarship, vol 6. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8160-7_6
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