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Title: Investigating the role of lead and lagged accounting variables in valuation models
Author: Al-Hares, Osama M.
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2003
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This study is an empirical attempt to investigate the theoretical and empirical role of lagged and lead accounting variables in cross-sectional valuation models. We evaluate the association between accounting variables (including earnings, book value, RD expenditures, advertising expenditures, dividends and capital contributions) and firm market value. The models for this study are derived from systems of linear information dynamics. Three samples of the US, the UK, and Jordanian firms are utilised to test the hypotheses. Stark (1999) presents evidence in the UK that lagged and lead variables can contribute in a significant way to increasing the explanatory power in cross-sectional valuation models. In the US, some recent literature show that not only current accounting variables are valuation relevant, but also the past time series of accounting variables are generally relevant for valuing firms (e.g. Bar-Yosef, Callen and Livnat (1996), Dechow, Hutton and Sloan (1998), Stark (1999), and Morel (1999)). On the other hand, previous research (e.g. Hand and Landsman (1999), and Stark (1999» uses next period's actual earnings as a proxy for omitted variables 'other information'. They find that next year's (lead) earnings captures the impact of valuation relevant 'other information' in the system of linear information dynamics and that, indeed, the valuation relevance of 'other information' is potentially substantial. These arguments motivate the investigation of the valuation relevance of lagged and lead accounting variables in cross-sectional valuation models. We primarily add in lead accounting variables as an attempt to control for the effects of 'other information'. We develop and discuss five different specifications (models) to investigate the value relevance of lagged and lead accounting variables. The valuation models are estimated using four different deflators found in prior literature on empirical valuation models (closing book value, number of shares, opening market value and sales). In market-based accounting research, deflation is generally regarded as an effective tool for mitigating heteroscedasticity and cross-sectional scale differences. The Data are extracted for US firms from the COMPUST A T for the period 1985 to 1999; for UK firms from the Datastream for the period 1990 to 1999; and from the Shareholders Annual Guides and Monthly Statistical Bulletins for Jordanian firms for the period 1985 to 1999. The study utilises all non-financial com~anies over the study period for which appropriate data are available for the necessary tests. The R and the adjusted R2 are used in this study for the comparison of the regression results under alternative specifications of the independent variables in the models. F tests on the increase in R2 are constructed to test the significance of the incrementally explanatory power between different specifications of valuation models employed. We use White's (1980) consistent standard error and covariance estimates for mitigating heteroscedasticity in calculating t-statistics. The results provide evidence on the empirical role of lagged and lead accounting variables in valuation models. This result is unaffected when proxies for 'other information' are included in the model. As a consequence, current, lagged and lead accounting variables included in our valuation model appear to be capturing some, but not all, of 'other information' when that variable is omitted. And hence, the selection of current, lagged, and lead accounting variables employed in this study is not complete and the variable 'other information' still needs further investigation. The results also indicate that, on average, RD expenditures and advertising expenditures create intangible assets for US firms. Similar evidence exists in the UK market regarding RD expenditures. The evidence in this research concerning the value relevance of lagged and lead accounting variables should aid future researchers in this area. As another perspective, this study will be helpful in diminishing the gaps and the controversies existing in the literature of valuation models.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available