Post on 12-Mar-2018
Valuation Properties of Earnings, Book Value, and Residual Income: The Case of Four Southeast Asian Countries
Kriengkrai Boonlert-U-Thai Ph.D. student
Gary Meek
Oscar S. Gellein/Deloitte & Touche Professor of Accounting
Shahrokh Saudagaran Arthur Andersen Alumni Centennial Professor and Head, School of Accounting
School of Accounting Oklahoma State University Stillwater, Oklahoma 74075
First Draft (in progress) September 2003
Draft only: Please do not quote without permission
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Valuation Properties of Earnings, Book Value, and Residual Income: The Case of Four Southeast Asian Countries
Kriengkrai Boonlert-U-Thai
Gary Meek Shahrokh Saudagaran
Oklahoma State University Abstract
This study examines the valuation properties of earnings, book value, and residual
income of non-financial listed firms in Indonesia, Malaysia, Singapore, and Thailand over the period 1993 - 2002. We adopt the methodology in Ashbaugh and Olsson (2002) to explore the valuation properties of reported accounting information. We find that the residual income model is the dominant accounting-based valuation model and the earnings capitalization model is the least dominant accounting-based valuation model for all four countries after the 1997 financial crisis. Before the 1997 financial crisis, the earnings capitalization model was the dominant accounting-based valuation model for Indonesia, Singapore, and Thailand while the residual income model still remained the dominant model in Malaysia. The results challenge the finding of Ashbaugh and Olsson (2002) because their findings indicate that the earnings capitalization model is the dominant accounting-based valuation model when cross-listed firms report under International Accounting Standards. In addition, our findings indicate that the explanatory power of all valuation models dramatically dropped during the financial crisis. Key Words: Valuation Properties, Earnings, Book value, and Residual Income. Data Availability: The data used in this study are available from the first author at School of Accounting, Oklahoma State University, Stillwater, OK 74075, USA; phone (405) 332-0672; e-mail: fcomkbl@hotmail.com.
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I. Introduction
Recently, there has been an increasing integration of global capital markets and an
increasing acceptance of International Accounting Standards (IAS) by several countries.
Equity investors are concerned with firm valuation in order to support their investment
decisions. The relative performance of the earnings capitalization, book value, and
residual income valuation models are normally used by investors and in academic research
(Barker 1999; Penman and Sougiannis 1998; Myers 1999; Collins et al. 1999) to draw
inferences on the valuation properties of listed firms� earnings and book values. This
study examines the valuation properties of earnings, book value, and residual income of
non-financial listed firms in Indonesia, Malaysia, Singapore, and Thailand over the period
1993 - 2002. We select these four countries because IAS is the primary basis for
accounting standards in these countries and government support, in general, is strong for
the IAS-based accounting standards adopted in Indonesia, Malaysia, Singapore, and
Thailand (Saudagaran and Diga 1997).
We adopt the methodology in Ashbaugh and Olsson (2002) to explore the
valuation properties of reported accounting information. Ashbaugh and Olsson (2002) use
the related performance valuation models to explore the valuation properties of
International Accounting Standards and U.S. Generally Accepted Accounting Principles
earnings and book values reported by non-U.S., cross-listed firms trading in a common
equity market. They find evidence that the earnings capitalization model is the dominant
accounting-based valuation model when cross-listed firms report under International
Accounting Standards (IAS) and that the residual income model is the dominant
accounting-based valuation model when cross-listed firms report under U.S. Generally
Accepted Accounting Principles (U.S. GAAP). We extend their study in order to see
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whether the earnings capitalization model is also the dominant accounting-based valuation
model in Southeast Asian countries adopting International Accounting Standards.
We find that the residual income model is the dominant accounting-based
valuation model and the earnings capitalization model is the least dominant accounting-
based valuation model for all four countries after the 1997 financial crisis. Before the
1997 financial crisis, the earnings capitalization model was the dominant accounting-
based valuation model for Indonesia, Singapore, and Thailand while the residual income
model still remained the dominant model in Malaysia. The results challenge the finding of
Ashbaugh and Olsson (2002) because their findings indicate that the earnings
capitalization model is the dominant accounting-based valuation model when cross-listed
firms report under International Accounting Standards. In addition, our findings indicate
that the explanatory power of all valuation models dramatically dropped during the
financial crisis.
The rest of the paper is organized as follows: Section II discusses institutional
background and related prior research. Section III outlines the research design. Section IV
presents sample selection. Results and conclusion are presented in sections V and VI,
respectively.
II. Institutional background and related prior research
Institutional background
The accounting systems in all four countries have recently developed. In general,
government support is strong for the IAS-based accounting standards adopted in
Indonesia, Malaysia, Singapore, and Thailand (Saudagaran and Diga 1997). Although
these four countries have recently adopted IAS and their financial reports may appear to
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be similar, significant differences in national requirements and the resulting financial
statements still exist.
Accounting standards in Indonesia draw heavily from US accounting sources. In
September 1994, Indonesia adopted 21 International Accounting Standards (IAS),
renamed �Indonesia Financial Accounting Standards� and made them mandatory for all
publicly listed companies (Saudagaran and Diga 2000). Indonesia requirements are based
on accounting standards issued by the Indonesian Institute of Accountants (Nobes 2001).
Accounting standards in Malaysia and Singapore have historically looked to the
UK in setting their domestic accounting standards. After the IASC�s formation in 1973,
Malaysia and Singapore were the two earliest countries in the ASEAN to adopt IASB
standards and both announced their support for the IASB�s efforts in the mid-1970s
(Saudagaran and Diga 2000). Malaysian requirements are based on the Companies Act
1965 and on the standards of the Malaysian Accounting Standard Board. The Malaysian
Accounting Standards Board uses IAS�s as the basis for developing accounting standards.
Singapore requirements are mainly based on the Companies Act and standards issued by
the Institute of Certified Public Accountants of Singapore (Nobes 2001).
Accounting standards in Thailand draw heavily from US accounting sources.
Thailand�s Recommended Accounting Concepts and Principles are based generally on US
GAAP, although they also incorporate concepts from the UK and Germany (Saudagaran
and Diga 2000). Thai requirements are mainly based on the Accounting Act BE 2543.
The Act specifies the requirement that the financial statements are prepared in accordance
with accounting standards. Thai accounting standards (TAS) issued by the Institute of
Certified Accountants and Auditors are applicable for the purpose of this Act. Listed
companies are required by the Security Exchange Commission to adopt TAS and also its
specific rules (Nobes 2001). Thailand is also among the earliest adopters of IASB
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standards. Currently, 17 of 23 Thai accounting standards are based on the IAS
(Saudagaran and Diga 2000).
Related prior research
Ashbaugh and Olsson (2002) used the relative performance of earnings
capitalization, book value, and the residual income valuation models to explore the
valuation properties of international accounting standards and U.S. generally accepted
accounting principles earnings and book value reported by non-U.S., cross-listed
companies trading in a common equity market. They found that the earnings
capitalization model is the dominant accounting-based valuation model when cross-listed
firms report under International Accounting Standards while the residual income model is
the dominant accounting-based valuation model when cross-listed firms report under U.S.
GAAP.
Barker (1999) examined the range of different valuation models that analysts and
fund managers use in practice, with an explicit focus on the role of dividend information
in equity valuation. He indicated that investors and other market participants use the
earnings capitalization, book value, and residual income valuation models in making
investment decisions.
Dechow et al. (1999) provided an empirical assessment of the residual income
valuation model proposed in Ohlson (1995). They pointed out that existing empirical
research relying on Ohlson�s model is similar to past research relying explicitly on the
dividend-discounting model. Their pricing tests indicated that stock prices partially reflect
the mean revision in residual income.
Myers (1999) implemented residual income valuation with linear information
dynamics as a method of estimating firm value based on expected future accounting
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numbers and documented the necessity of using linear information models of the time
series of accounting numbers in valuation.
Penman and Sougiannis (1998) contrasted dividend discount techniques,
discounted cash flow analysis, and techniques based on accrual earnings when each is
applied with finite-horizon forecasts. They found that valuation errors are lower using
accrual earnings techniques rather than cash flow and dividend discounting techniques.
III. Research design
With the increase in global capital market integration, domestic and international
financial information users need to understand the valuation properties of accounting
variables in these Southeast Asian capital markets for their investment decision making.
Globally, we can see that International Accounting Standards (IAS) and U.S. Generally
Accepted Accounting Standards (U.S. GAAP) are two major accepted accounting
standards. After the economic crisis in 1997, the four countries in our study shifted the
emphasis of their accounting standards to International Accounting Standards rather than
U.S. GAAP. Ashbaugh and Olsson (2002) used the relative performance of the earnings
capitalization, book value, and residual income valuation models to explore the valuation
properties of International Accounting Standards and U.S. Generally Accepted
Accounting Principles earnings and book values reported by non-U.S., cross-listed firms
trading in a common equity market. They found that earnings capitalization model is the
dominant valuation model when the IAS analyses evaluate IAS firms� shares. We extend
their study in order to see whether the earnings capitalization model is also the dominant
accounting-based valuation model in Southeast Asian countries adopting the International
Accounting Standards. Since these four Southeast Asian Accounting Standards are based
on International Accounting Standards, our research questions are:
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Q1: Are these three accounting-based valuation models relevant for non-financial listed
firms traded in Southeast Asian capital markets?
Q2: Is the earnings capitalization model the dominant accounting-based valuation
model for non-financial listed firms traded in Southeast Asian capital markets?
Davis-Friday et al. (2002) examined the value relevance of earnings and book
values in four Asian countries, Indonesia, South Korea, Malaysia, and Thailand, in the
period surrounding the Asian financial crisis. Their results indicated that the value
relevance of earnings in Indonesia and Thailand was significantly reduced during the
Asian financial crisis while the value relevance of book values increased. In Malaysia, the
value relevance of both earnings and book value decreased during the crisis. We extend
their study by examining whether the Asian financial crisis affected the valuation
properties of earnings, book value, and residual income valuation models of non-financial
institution listed firms traded in our selected countries. Our third research question is:
Q3: Did the Asian financial crisis affect the valuation properties of earnings, book
value, and residual income valuation models in non- financial listed firms traded in
Southeast Asian capital markets?
We use the following three models explored by Ashbaugh and Olsson (2002) to answer
research questions 1 and 2:
(EC) Pit = α + β1Eit + εit (1)
(BV) Pit = α + β1BVit + εit (2)
(RI) Pit = α + β1BVit + β2RIit + εit (3)
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Where:
Pit = Monthly Stock price of firm i 60 days after the end of accounting period t.
Eit = Earnings of firm i for accounting period t.
BVit = Book value of equity of firm i at the end of accounting period t.
RIit = Residual income of firm i for accounting period t.
The explanatory power (adjusted R2) measures the strength of the association
between the accounting variable(s) and price. The residual income (RI) model assumes
clean surplus accounting and is defined as current net income minus the discount rate (r)
times book value at the beginning of the period. Our analysis requires the discount rate, r.
Prior research finds that the choice of discount rate does not affect cross-sectional analyses
of the RI model (Frankel and Lee 1998; Francis et al. 2001; Ashbaugh and Olsson 2002).
We also apply a 10 percent discount rate in our tabulated results. As a sensitivity analysis,
we apply discount rates ranging from 6 percent to 16 percent in calculating residual
income values, which are consistent with the methodology used in an Ashbaugh and
Olsson (2002) study.
In order to examining the effect of financial crisis on the valuation properties of
earnings, book value, and residual income valuation models, we use a dummy variable
representing financial crisis year and estimate the following regression models:
(EC) Pit = α + β1I +β2Eit +β3I*Eit + εit (4)
(BV) Pit = α + β1I +β2BVit +β3I*BVit + εit (5)
(RI) Pit = α + β1I +β2BVit +β3RIit +β4I*BVit +β5I*RIit + εit (6)
Where:
I = Dummy variable that equals one if year is 1997 (financial crisis year) and zero
otherwise.
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IV. Sample selection
Our sample covers publicly traded firms in Indonesia, Malaysia, Singapore, and
Thailand across the period from 1993 to 2002. The stock prices and accounting data for
this study are from the Global Vantage Database. We restrict our sample to non-financial
firms that report earnings and book values and whose shares trade in these four Southeast
Asian capital markets. Combining all three accounting-based valuation models gives us
the total of 9,018 observations for earnings capitalization model, the total of 9,153
observations for book value model, and the total of 8,092 observations for residual income
model.
V. Results
Panel A of Table 1 reports the results of the relative performance of three
accounting-based valuation models when we pool all data. We find that all valuation
models have very low explanatory power. Adding dummy variables for year and country
into our three valuation models shows that the three valuation properties should be
evaluated by looking at specific years and country rather than using the pooled data of all
years and countries. Panel B of Table 1 reports the trend of explanatory power across
years and Panel C of Table 1 reports the trend of explanatory power across countries. We
find that the book value model is not relevant as their explanatory power is close to zero in
most years. Earnings capitalization and residual income valuation models are relevant and
their explanatory power has increased since the financial crisis year.
Table 2 reports the results of the relative performance of three accounting-based
valuation models for Indonesia. We find that the residual model is the dominant valuation
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model in 2002 as the earnings explains 26 percent of price, the book value explains 85
percent of price, and the residual income explains 96 percent of price. Panel A of Figure 1
shows that the RI model is the 1st dominant valuation model and the BV model is the 2nd
dominant valuation model for Indonesia after the financial crisis year. The EC model used
to be the dominant valuation model for Indonesia before the financial crisis year and is the
least dominant valuation model after the crisis year.
Table 3 reports the results of the relative performance of three accounting-based
valuation models for Malaysia. We find that the residual model and the book value
models are the first and second dominant valuation models in 2002 as the earnings
explains 30 percent of price, the book value explains 72 percent of price, and the residual
income explains 73 percent of price. Panel B of Figure 1 shows that the RI model is the
1st dominant valuation model and the BV model is the 2nd dominant valuation model for
Malaysia both before and after the financial crisis year.
Table 4 reports the results of the relative performance of three accounting-based
valuation models for Singapore. We find that the residual model and the book value
models are the first and second dominant valuation models in 2002 as the earnings
explains 49 percent of price, the book value explains 75 percent of price, and the residual
income explains 77 percent of price. Panel C of Figure 1 shows that the RI model is the
1st dominant valuation model and the BV model is the 2nd dominant valuation model for
Singapore after the financial crisis year. The EC model used to be the dominant valuation
model for Singapore before the financial crisis year and is the least dominant valuation
model after the crisis year.
Table 5 reports the results of the relative performance of three accounting-based
valuation models for Thailand. We find that the residual model is the dominant valuation
model in 2002 as the earnings explains 61 percent of price, the book value explains 57
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percent of price, and the residual income explains 66 percent of price. Panel D of Figure 1
shows that the RI model is the 1st dominant valuation model and the BV model is the 2nd
dominant valuation model for Thailand after the financial crisis year. The EC model used
to be the dominant valuation model for Thailand before the financial crisis year and is the
least dominant valuation model after the crisis year (except the year 2002).
Using the dummy variable (I) to test whether the 1997 financial crisis affects the
valuation properties, we find that the explanatory power of all valuation models
dramatically decreased during the financial crisis. This finding is consistent with the
results of Table 1 and Figure 1.
Sensitivity Tests
The earnings capitalization model requires an income (earnings) measure.
Consistent with prior research, we used net income excluding extraordinary items in the
results reported above. As a sensitivity test, we re-ran the analysis using net income
including extraordinary items, with no change in results. These tests are shown in Panels
A, B, D, and D of Figure 2.
The residual income model requires a discount rate (r). Consistent with Ashbaugh
and Olsson (2002), we used a discount rate of 10 percent in the results reported above. As
a sensitivity test, we re-ran our analysis using discount rates of 6 and 16 percent, with no
change in results. These tests are shown in panels A, B, C, and D of Figure 3 (6 percent)
and in panels A, B, C, and D of Figure 4 (16 percent).
VI. Conclusion
We use a sample of non-financial listed firms in Indonesia, Malaysia, Singapore,
and Thailand to explore the valuation properties of earnings, book value, and residual
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income valuation models. We find that the residual income model is the dominant
accounting-based valuation model and the earnings capitalization model is the least
dominant accounting-based valuation model for all four countries after the 1997 financial
crisis. Before the 1997 financial crisis, the earnings capitalization model was the
dominant accounting-based valuation model for Indonesia, Singapore, and Thailand while
the residual income model was the dominant model in Malaysia. The results challenge the
finding of Ashbaugh and Olsson (2002) because their findings indicate that the earnings
capitalization model is the dominant accounting-based valuation model when cross-listed
firms report under International Accounting Standards. In addition, our findings indicate
that the explanatory power of all valuation models dramatically dropped during the
financial crisis and the valuation properties should not be considered by pooled data.
Since there is difference in valuation properties of IAS-based valuation model across these
four countries, we should evaluate the valuation properties by considering specific years
and countries rather than using the pooled data of all years and countries.
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of cross-listed firms� IAS and U.S. GAAP earnings and book value. The Accounting Review. Vol. 77, No. 1: 107-126.
Barker, R. (1999). The role of dividends in valuation models used by analysts and fund managers." European Accounting Review. Vol. 8: 195-218.
Chen, S. and J. Dodd. 2001. Operating Income, Residual Income and EVA: Which Metric Is More The value relevance?. Journal of Managerial Issues. Vol. XIII, No. 1: 65-86.
Collins, D., M. Pincus, and H. Xie. 1999. Equity valuation and negative earnings: The role of book value of equity. The Accounting Review. Vol. 74: 29-61.
Davis-Friday, P., L. Eng, and C. Liu. 2002. The effect of corporate governance on the valuation of book value and earnings during the Asian financial crisis. Working paper.
Dechow, P., A. Hutton, and R. Sloan. 1999. An empirical assessment of residual income valuation model. Journal of Accounting and Economics. Vol. 26: 1-34.
Easton, P. 1999. Security Returns and the value relevance of Accounting Data. Accounting Horizons. Vol. 13, No. 4: 399-412.
Francis, J., P. Olsson, and D. Oswald. 2001. Using mechanical earnings and residual income forecasts in equity valuation. Working paper, Duke University and London Business School.
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IAS Plus. (2002). Country Updates: Thailand. Deloitte Touche Tohmatsu. http://www.iasplus.com/country/thailand.htm Myers, J. 1999. Implementing residual income valuation with linear information
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against international accounting standards. Ohlson, A. 1995. Earnings, book values, and dividends in security valuation.
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approaches to equity valuation. Contemporary Accounting Research. Vol. 15: 343- 383.
Saudagaran, S.M., and J.G. Diga. 1997. Financial reporting in emerging capital markets: Characteristics and policy issues. Accounting Horizons. Vol. 11: 41-64.
Saudagaran, S.M., and J.G. Diga. 1997. Accounting regulation in ASEAN: A choice between the global and regional paradigms of harmonization. Journal of International Financial Management and Accounting. Vol. 8: 1-32.
Saudagaran, S.M., and J.G. Diga. 2000. The institutional environment of financial reporting regulation in ASEAN. The International Journal of Accounting. Vol 35: 1-26.
Werner, R. 1998. Capital Market in Thailand: Issues and Opportunities. A study of financial markets. 106-134.
Table 1 Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Using �Year� and �Country� dummy variables, we find that these three valuation properties should be evaluated by looking at specific years and country rather than using the pooled data of all years and countries. Variable Definitions: P is the price per share at fiscal year; E is the earnings per share at fiscal year; BV is the book value per share at fiscal year; RI is the residual income measured by using the formula: net income per share � 0.10 x (one year lagged book value per share)
Panel A: Valuation of All SampleIntercept Earnings Book Value Residual Income Adjusted R2 n
Earnings Capitalization Model 195.41 *** -0.01 *** 0.01 9018Book Value Model 198.90 *** 0.00 0.00 9153Residual Income Model 155.65 *** 4.35 *** -0.02 *** 0.01 8092
Table 1 (Continued) Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel B: Valuation of All Sample by YearIntercept Earnings Book Value Residual Income Adjusted R2 n
Earnings Capitalization Model 195.41 *** -0.01 *** 0.01 90181993 120.96 *** 7.81 *** 0.64 3671994 -23.33 13.56 *** 0.93 5271995 86.68 5.65 *** 0.56 6031996 38.26 12.03 *** 0.98 6431997 215.67 *** 3.19 *** 0.09 10861998 154.49 *** -0.01 *** 0.12 11281999 254.27 *** -0.14 *** 0.10 11622000 200.73 *** 1.07 *** 0.12 11462001 65.33 *** 1.45 *** 0.27 11802002 -2.99 16.16 *** 0.64 1176
Book Value Model 198.90 *** 0.00 0.00 91531993 242.59 *** -1.11 0.00 3691994 232.13 10.16 0.00 5351995 346.30 ** -0.01 0.00 6121996 419.64 ** 0.04 0.00 6521997 193.02 *** 0.00 0.00 11031998 183.43 *** -1.23 *** 0.01 11451999 257.60 *** 2.59 0.00 11792000 166.03 *** 2.43 0.00 11682001 77.75 *** 0.90 0.00 11982002 10.24 0.87 ** 0.00 1192
Residual Income Model 155.65 *** 4.35 *** -0.02 *** 0.01 80921993 144.54 *** -1.05 7.21 *** 0.68 3061994 100.99 *** -0.24 4.48 *** 0.70 3671995 2.35 1.74 9.28 *** 0.93 5571996 132.04 * 2.33 10.74 *** 0.88 6021997 206.46 ** 8.35 ** 3.20 *** 0.09 6431998 163.65 *** -0.69 -0.01 *** 0.12 10971999 261.82 *** -0.70 -0.14 *** 0.10 11502000 213.93 *** -1.46 1.09 *** 0.12 11352001 68.19 *** -0.21 1.44 *** 0.27 11632002 3.26 0.63 *** 16.33 *** 0.64 1072
* = significant at p < .10, two-tailed test.** = significant at p < .05, two-tailed test.*** = significant at P < .01, two-tailed test.
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Table 1 (Continued) Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel C: Valuation of All Sample by CountryIntercept Earnings Book Value Residual Income Adjusted R2 n
Earnings Capitalization Model 195.41 *** -0.01 *** 0.01 9018Indonesia 1862.23 *** -0.01 ** 0.00 901Malaysia 3.91 *** 0.00 0.00 4120Singapore 1.45 *** 7.68 *** 0.29 2033Thailand 29.26 *** 2.61 *** 0.25 1964
Book Value Model 198.90 *** 0.00 0.00 9153Indonesia 1897.44 *** 6.04 0.00 912Malaysia 3.90 *** 0.00 0.00 4164Singapore 2.12 *** 0.00 *** 0.01 2078Thailand 33.45 *** 0.00 *** 0.13 1999
Residual Income Model 155.65 *** 4.35 *** -0.02 *** 0.01 8092Indonesia 1423.79 *** 207.84 *** -0.20 *** 0.15 809Malaysia 0.66 *** 1.43 *** 0.00 0.34 3668Singapore 0.97 *** 0.75 *** 0.02 0.34 1823Thailand 15.48 *** 0.66 *** 1.23 *** 0.36 1792
* = significant at p < .10, two-tailed test.** = significant at p < .05, two-tailed test.*** = significant at P < .01, two-tailed test.
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Table 2 Relative Performance of Accounting-Based Valuation Models: Indonesia
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
* = significant at p < .10, two-tailed test.** = significant at p < .05, two-tailed test.*** = significant at P < .01, two-tailed test.
Valuation of All Sample by Year and CountryIndonesia
Intercept Earnings Book Value Residual Income Adjusted R2 nEarnings Capitalization Model 1862.23 *** -0.01 ** 0.00 901
1993 1227.88 *** 6.10 *** 0.58 371994 -337.36 13.65 *** 0.93 491995 202.80 9.28 *** 0.92 731996 303.10 11.97 *** 0.98 771997 1666.13 *** 3.60 *** 0.12 1381998 1115.27 *** -0.01 *** 0.11 1511999 1924.49 *** -0.13 *** 0.10 1502000 1593.57 *** 1.23 *** 0.17 1432001 916.43 *** 1.27 *** 0.25 792002 -1035.47 20.43 0.26 4
Book Value Model 1897.44 *** 6.04 0.00 9121993 526.06 * 1786.23 *** 0.63 371994 -604.29 1668.24 *** 0.88 501995 -138.14 1475.61 *** 0.92 731996 340.82 1329.14 *** 0.95 771997 739.30 *** 443.63 *** 0.49 1391998 1142.67 *** -13.69 *** 0.11 1521999 1591.18 *** 308.23 *** 0.23 1522000 1310.10 *** 43.32 ** 0.04 1462001 845.93 *** 122.63 *** 0.21 822002 -931.63 951.86 * 0.85 4
Residual Income Model 1423.79 *** 207.84 *** -0.20 *** 0.15 8091993 569.33 *** 1193.00 *** 2.78 *** 0.78 351994 874.42 *** 31.37 3.56 *** 0.69 371995 -244.97 803.00 *** 4.49 *** 0.95 631996 302.18 372.39 *** 8.80 *** 0.99 731997 1197.23 *** 435.40 *** 3.03 *** 0.61 771998 632.69 ** 469.75 *** -0.45 *** 0.21 1511999 1495.63 *** 482.63 *** 0.12 ** 0.24 1492000 1609.20 *** -4.40 1.26 *** 0.17 1432001 950.04 *** -20.46 1.40 *** 0.24 772002 -2076.43 793.53 9.50 0.96 4
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Table 3 Relative Performance of Accounting-Based Valuation Models: Malaysia
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
* = significant at p < .10, two-tailed test.** = significant at p < .05, two-tailed test.*** = significant at P < .01, two-tailed test.
Valuation of All Sample by Year and CountryMalaysia
Intercept Earnings Book Value Residual Income Adjusted R2 nEarnings Capitalization Model 3.91 *** 0.00 0.00 4120
1993 -1.07 57.53 *** 0.95 1491994 2.93 ** 25.77 *** 0.73 2191995 6.76 *** 0.00 0.00 2491996 8.76 *** -1.99 *** 0.05 2791997 2.55 *** 0.42 0.00 5041998 2.30 *** -1.07 *** 0.14 5121999 3.18 *** 0.91 *** 0.06 5232000 2.24 *** 3.38 *** 0.20 5202001 2.55 *** 1.80 *** 0.04 5502002 1.93 *** 5.81 *** 0.30 615
Book Value Model 3.90 *** 0.00 0.00 41641993 -9.76 *** 11.43 *** 0.83 1491994 -2.81 ** 5.69 *** 0.72 2221995 6.70 *** 7.35 0.00 2521996 2.05 ** 2.77 *** 0.45 2801997 1.14 *** 0.67 *** 0.16 5081998 1.82 *** 0.39 *** 0.14 5201999 0.87 *** 1.13 *** 0.61 5312000 0.48 *** 0.87 *** 0.65 5262001 0.08 1.19 *** 0.72 5552002 -0.20 1.18 *** 0.72 621
Residual Income Model 0.66 *** 1.43 *** 0.00 0.34 36681993 2.37 *** 2.80 *** 7.26 *** 0.54 1171994 -1.08 3.54 *** 19.78 *** 0.97 1471995 2.29 *** 1.98 *** -6.60 *** 0.62 2311996 1.98 ** 2.77 *** 0.00 0.45 2491997 0.78 ** 0.81 *** -1.56 *** 0.42 2811998 0.66 *** 0.55 *** -1.83 *** 0.54 5011999 0.73 *** 1.16 *** -0.31 *** 0.62 5212000 0.54 *** 0.88 *** 0.37 * 0.65 5182001 0.08 1.20 *** 0.17 0.72 5442002 -0.13 1.19 *** 0.60 ** 0.73 559
19
Table 4 Relative Performance of Accounting-Based Valuation Models: Singapore
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
* = significant at p < .10, two-tailed test.** = significant at p < .05, two-tailed test.*** = significant at P < .01, two-tailed test.
Valuation of All Sample by Year and CountrySingapore
Intercept Earnings Book Value Residual Income Adjusted R2 nEarnings Capitalization Model 1.45 *** 7.68 *** 0.29 2033
1993 2.49 *** 11.63 *** 0.40 811994 1.73 *** 11.90 *** 0.36 1241995 2.20 *** 9.32 *** 0.28 1401996 1.83 *** 10.44 *** 0.33 1441997 1.27 *** 6.15 *** 0.30 1971998 1.42 *** 3.39 *** 0.15 2121999 1.26 *** 13.63 *** 0.53 2392000 0.86 *** 8.06 *** 0.37 2472001 1.21 *** 2.31 *** 0.04 3052002 0.55 *** 12.79 *** 0.49 344
Book Value Model 2.12 *** 0.00 *** 0.01 20781993 4.90 *** 0.03 * 0.03 821994 3.49 *** 0.03 ** 0.03 1271995 3.53 *** 0.01 0.00 1441996 3.39 *** 0.01 0.01 1501997 1.95 *** 0.01 ** 0.02 2041998 1.49 *** 0.00 *** 0.06 2181999 0.39 1.38 *** 0.49 2432000 -0.18 1.44 *** 0.50 2532001 0.16 0.94 *** 0.63 3102002 0.10 0.87 *** 0.75 347
Residual Income Model 0.97 *** 0.75 *** 0.02 0.34 18231993 2.89 *** 0.98 *** 9.00 *** 0.32 611994 2.51 *** 0.95 *** 8.90 *** 0.29 801995 2.25 *** 0.82 *** 7.03 *** 0.26 1281996 1.55 *** 1.07 *** 7.62 *** 0.34 1391997 0.93 ** 0.76 *** 4.42 *** 0.44 1421998 0.60 *** 0.63 *** 0.86 * 0.45 1991999 0.67 ** 1.51 *** 6.06 *** 0.55 2312000 -0.27 1.63 *** 1.75 ** 0.58 2402001 0.17 0.95 *** 0.00 0.63 3002002 0.13 1.05 *** 3.01 *** 0.77 303
20
Table 5 Relative Performance of Accounting-Based Valuation Models: Thailand
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
* = significant at p < .10, two-tailed test.** = significant at p < .05, two-tailed test.*** = significant at P < .01, two-tailed test.
Valuation of All Sample by Year and CountryThailand
Intercept Earnings Book Value Residual Income Adjusted R2 nEarnings Capitalization Model 29.26 *** 2.61 *** 0.25 1964
1993 64.20 *** 5.06 *** 0.26 1001994 38.09 *** 7.08 *** 0.55 1351995 29.74 *** 6.67 *** 0.59 1411996 20.69 *** 6.36 *** 0.65 1431997 23.50 *** 1.64 *** 0.19 2471998 20.61 *** 0.86 *** 0.09 2531999 27.09 *** 1.01 *** 0.12 2502000 17.28 *** 1.92 *** 0.30 2362001 16.97 *** 2.76 *** 0.42 2462002 15.85 *** 5.16 *** 0.61 213
Book Value Model 33.45 *** 0.00 *** 0.13 19991993 4.90 *** 0.03 * 0.03 1011994 25.23 *** 1.33 *** 0.34 1361995 57.71 *** 0.00 -0.01 1431996 42.29 *** 0.00 -0.01 1451997 22.98 *** 0.00 *** 0.67 2521998 6.15 *** 0.59 *** 0.36 2551999 10.68 *** 0.58 *** 0.37 2532000 6.64 *** 0.47 *** 0.36 2432001 6.52 *** 0.56 *** 0.54 2512002 7.24 *** 0.77 *** 0.57 220
Residual Income Model 15.48 *** 0.66 *** 1.23 *** 0.36 17921993 63.17 *** 0.58 * 2.54 0.22 931994 26.09 *** 1.02 *** 5.07 *** 0.50 1031995 28.09 *** 0.64 *** 5.99 *** 0.57 1351996 13.87 *** 0.80 *** 5.23 *** 0.67 1411997 12.82 *** 0.50 *** 0.69 *** 0.28 1431998 6.56 *** 0.59 *** 0.14 0.36 2461999 12.91 *** 0.56 *** 0.46 *** 0.39 2492000 8.90 *** 0.44 *** 0.73 *** 0.39 2342001 8.13 *** 0.54 *** 0.98 *** 0.58 2422002 8.81 *** 0.71 *** 2.73 *** 0.66 206
21
Figure 1 Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel A: Indonesia
Adjusted R-Square: Indonesia
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
22
Figure 1 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel B: Malaysia
Adjusted R-Square: Malaysia
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
23
Figure 1 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel C: Singapore
Adjusted R-Square: Singapore
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
24
Figure 1 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel D: Thailand
Adjusted R-Square: Thailand
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
25
Sensitivity Test: (Using EPS including extraordinary items for equation 1) Figure 2 Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel A: Indonesia
Adjusted R-Square: Indonesia
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
26
Sensitivity Test: (Using EPS including extraordinary items for equation 1) Figure 2 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel B: Malaysia
Adjusted R-Square: Malaysia
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
EBVRI
27
Sensitivity Test: (Using EPS including extraordinary items for equation 1) Figure 2 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel C: Singapore
Adjusted R-Square: Singapore
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
EBVRI
28
Sensitivity Test: (Using EPS including extraordinary items for equation 1) Figure 2 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel D: Thailand
Adjusted R-Square: Thailand
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
29
Sensitivity Test: (Using discount rate = 6% for equation 03) Figure 3 Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel A: Indonesia
Adjusted R-Square: Indonesia
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
30
Sensitivity Test: (Using discount rate = 6% for equation 03) Figure 3 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel B: Malaysia
Adjusted R-Square: Malaysia
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
31
Sensitivity Test: (Using discount rate = 6% for equation 03) Figure 3 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel C: Singapore
Adjusted R-Square: Singapore
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
32
Sensitivity Test: (Using discount rate = 6% for equation 03) Figure 3 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel D: Thailand
Adjusted R-Square: Thailand
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
33
Sensitivity Test: (Using discount rate = 16% for equation 03) Figure 4 Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel A: Indonesia
Adjusted R-Square: Indonesia
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI
34
Sensitivity Test: (Using discount rate = 16% for equation 03) Figure 4 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel B: Malaysia
Adjusted R-Square: Malaysia
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
EBVRI
35
Sensitivity Test: (Using discount rate = 16% for equation 03) Figure 4 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel C: Singapore
Adjusted R-Square: Singapore
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
EBVRI
36
Sensitivity Test: (Using discount rate = 16% for equation 03) Figure 4 (Continued) Yearly Adjusted R2 of Relative Performance of Accounting-Based Valuation Models
Model 1: Earnings Capitalization (EC) Pit = α + β1Eit + ε
Model 2: Book Value (BV) Pit = α + β1BVit + εit
Model 3: Residual Income (RI) Pit = α + β1BVit + β2RIit + εit
Panel D: Thailand
Adjusted R-Square: Thailand
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Adj
uste
d R
-Squ
are
EBVRI