Investigatino The Relationship Beween Maret Values And Accounting Numbers For 30 Selected Australia Listed Companies

Investigating the Relationship between Market
Values and Accounting Numbers for 30 Selected
Australian Listed Companies

Victoria Jane Clout

B. Business (Hons.) (Queensland University of Technology)

A dissertation submitted for the degree of Doctor of Philosophy within the
School of Accountancy, Faculty of Business, Queensland University of
Technology

April 2007


Investigating the Relationship between Market Values and
Accounting Numbers for 30 Australian Listed Companies

ABSTRACT
In capital market research (CMR) studies of the value relevance of accounting
numbers are founded upon the concept that, in equilibrium, the book values
are equal to or have some long-term relationship with the market value and
that market returns are related to book returns.
This thesis seeks to resolve a gap in the CMR by examining 30 selected
individual firms listed on the Australian stock market during the period 1950
to 2004, using equilibrium correction modelling techniques. Even these
limited prior works used cross-sectional techniques rather than the long-run,
time-series, analysis used in this study. Moreover, dynamic analysis in the
CMR has tended to focus on indexes or portfolio data rather than using firmspecific case study data of the type modelled here. No prior research has
taken this approach using Australian data.
The results of this thesis indicated that an equilibrium correction relationship

between market values and book values for firms listed on the Australian
Stock Exchange (ASX) could be determined by using accounting and
macroeconomic regressors. The findings of the thesis were consistent with
the literature in terms of the variables suggested and important in the firm’s
valuation from the three main approaches, the analysts (industry) approach,
the finance and accounting theory (textbook) approach and the CMR
literature approach. The earnings, dividends and book value variables are
significant in their relationships with the firm’s market values. The models
constructed were typically more informative and had an increased forecasting
performance compared with the a priori models tested, based on theory and
the literature.
Keywords
Capital market research; Value Relevance; Dynamic Modelling Equilibrium
correction; Error correction models; Forecasting; Sufficiency

ii


iii


Contents
Chapter 1 Introduction
1.1

Purpose of the study

1

1.2

Relationship to prior research

3

1.3

Motivation

6

1.4

Research question

7

1.5

Significance of the study

8

1.6

Outline of thesis

9

Chapter 2 Literature review

2.1

Introduction

11

2.2

Financial analyst’s approach

11

2.3

Finance and accounting theory (textbook) approaches

13

2.4

Capital market approaches

21

2.4.1

22

2.5

Cross-sectional studies – fundamental analysis

2.4.2 Earnings

24

2.4.3

Book value

26

2.4.4

Combined role of book value and earnings

27

2.4.5

Time series studies

28

2.4.6 Gaps in current CMR literature

29

Summary

33

Chapter 3 Theoretical framework
3.1

Introduction

35

3.2

Issues emanating from current CMR

36

3.3

Variable identification

37

3.4

Functional form

38

3.5

Dynamic specification

38

3.6

Replication for benchmarking

40
iv


3.7

Benchmarking in final ‘best’ model selection

40

3.8

Economic theory at the foundational level of CMR

42

3.9

Examination of results in firm specific context

43

3.10 The sufficiency of accounting numbers for market value

44

3.11 Framework

44

3.12 Summary

45

Chapter 4 Research methods
4.1

Introduction

46

4.2

Selected sample of 30 firms

47

4.2.1 Criteria for the selection of firms

47

Variable definitions

53

4.3.1 The dependent variables

53

4.3.2 Independent variables

58

4.4

Currency

65

4.5

Testing down procedure for the statistical models

67

4.5.1 General-to-specific approach

67

4.3

4.5.2

Testing for co-integration using an equilibrium
correction model (ECM)

68

4.6 Benchmarking of models and procedure for the
selection of the ‘best’ model for each firm

70

4.6.1 Benchmarking of models

70

4.6.2 Procedure for the selection of the ‘best’
model for each firm

73

4.7

Diagnostic tests

74

4.8

Summary

76

v


Chapter 5 Results
5.1

Introduction

77

5.2

Descriptive statistics

78

5.3

Levels of integration of the variables

85

5.3.1 ACF graphical analysis

85

5.3.2 ADF statistical evidence

91

Results at the untransformed (raw) level

97

5.4

5.4.1 Statistical equilibrium correction models
for all 30 firms
5.4.2

Rationale for discontinuing untransformed (raw)
level to the next phase

5.5

97

Results at the logged level for each of the 30 firms

105
107

5.5.1 Statistical equilibrium correction models
for all 30 firms
5.5.2 Benchmark results

107
114

5.3.3 Summary of the ‘best’ models phase for the 30 firms
selected in the benchmarking

116

5.5.4 Graphical analysis of model performance and model
recursives for the ’best’ models
5.6

5.7

5.8

123

Comparison of the untransformed and
log-transformed results

126

Events during the study period identified

127

5.7.1 Market value events

127

5.7.2 Book value events

130

5.7.3 Earnings events

132

5.7.4 Dividend events

134

5.7.5 Macro-economic events

136

Summary

138

vi


Chapter 6 Discussion and analysis
6.1

Introduction

139

6.2

Overall results for the entire sample of 30 firms

139

6.3

Analysis of the five selected firms ‘best’ models

140

6.3.1

Statistical model example - Burns, Philp & Co Ltd 140

6.3.2

Real statistical model example - Southcorp Ltd

144

6.3.3 Random walk with trend model example Permanent Trustee Co Ltd
6.3.4
6.3.5

Earnings capitalisation model example Australian Gas Light Co Ltd

149

Ohlson-type model example - Coles Myer Ltd

151

6.3.6 Summary of discussion
6.4

147

154

Comparative analysis of firms with non-statistical ‘best’
models

156

6.4.1

The Australian Gas Light Company

156

6.4.2

Angus & Coote (Holdings) Ltd

157

6.4.3

Argo Investments Ltd

158

6.4.4

Coles Myer Ltd

159

6.4.5

Campbell Brothers Ltd

160

6.4.6 Harris Scarfe Holdings Ltd

161

6.4.7 DJL Ltd

162

6.4.8

MIM Holdings Ltd

162

6.4.9

The National Australia Bank

163

6.4.10 Permanent Trustee Co. Ltd

164

6.4.11 Smith (Howard) Ltd

165

6.4.12 Southcorp Ltd

166

6.4.13 WMC Limited

166

6.4.14 Woodside Petroleum Ltd

167

6.4.15 Summary

168
vii

6.5

Analysis of the consistency, value relevance
and sufficiency of the 30 companies

168

6.5.1 Consistency

168

6.5.2 Value relevance

172

6.5.3 Sufficiency

173

6.5.4 Ranking

176

6.6

Discussion of overall findings

180

6.7

Comparison of results with literature

182

6.7.1

Analyst approaches to valuation

182

6.7.2

Finance textbook approaches to valuation

185

6.7.3

Accounting textbook approaches to valuation

187

6.8

6.7.4 Capital market approaches

192

Summary

196

Chapter 7 Conclusions
7.1

Introduction

199

7.2

Summary of thesis

200

7.3

Main findings

201

7.4

Limitations and future research

206

References

208

Appendix A – Standard procedure

228

Appendix B – Accounting & market value and data levels
of integration

232

Appendix C – Benchmarking results for all 30 selected firms 293

viii


Appendix D – Results used untransformed (raw) data – change in
market value as the dependent variable (estimated for 4-year holdout forecasting period)

323

Appendix E – The ‘best’ model performance and recursive graphics
for all 30 firms – based a 10 year hold out forecasting period

354

Appendix F - companies with alterative models to the statistical
model selected as ‘best’ comparative figures

385

ix


List of Tables
Table 4.1 Number of companies on the Sydney Stock Exchange Official List as
at December 31, 1945-1962

48

Table 4.2 Selected sample of 30 firms

50

Table 4.3 Market sector representation for the sample of 30 firms

51

Table 4.4 Exact periods raw share price obtained from the CRIF
AGSM Annual Report Record (ARR) database (from the master dataset
held at the CRIF AGSM)

55

Table 4.5 Australian Foundation Investment Company Ltd raw share
price collection source information

56

Table 4.6 Exact sources of raw share price for the 30 firms

57

Table 4.7 Exact periods accounting numbers obtained from the CRIF
AGSM Annual Report Record (ARR) database (from the master dataset
held at the CRIF AGSM)

61

Table 4.8 Australian Foundation Investment Company Ltd accounting
number sources

65

Table 4.9 Example of currency conversion for Australian Foundation
Investment Co Ltd

66

Table 4.10 Models constructed

74

Table 4.11 Diagnostic tests and RMSE

79

Table 5.1-1 Descriptive statistics of financial data for the 30 firms –
firms AFI to FHF

80

Table 5.1-2 Descriptive statistics of financial data for the 30 firms –
firms GOW to STO

81

Table 5.1-3 Descriptive statistics of financial data for the 30 firms –
firms TTH to WPL

82

Table 5.2 Descriptive statistics for macro-economic variables
(1950 to 2004)

83

Table 5.3 Summary of interpretations of correlograms for the
thirty firms

88

Table 5.3-1 Augmented Dickey Fuller (ADF) tests on individual firms –
AFI to CSR (tested with a trend and a constant and at the first lag level)

94
x


Table 5.3-2 Augmented Dickey Fuller (ADF) tests on individual firms

– FHF to SOL (tested with a trend and a constant and at the first
lag level)

95

Table 5.3-3 Augmented Dickey Fuller (ADF) tests on individual firms –
SRP to WPL (tested with a trend and a constant and at the first
lag level)

96

Table 5.3-4 ADF test: for the macro-economic variables

98

Table 5.4-1 Untransformed statistical model results for the first
eleven firms

100

Table 5.4-2 Untransformed statistical model results for the next
eleven firms

101

Table 5.4-3 Untransformed statistical model results for the final
eight firms

102

Table 5.4-4 Inclusion of variables in the SRD and LRD
(untransformed version)

103

Table 5.4-5 Combinations of financial variables in the short (SRD)
and long (LRD) dynamics

104

Table 5.5-1 Summary of statistical models (model 1) developed for
each of the thirty firms – firms AFI to HSL

109

Table 5.5-2 Summary of statistical models (model 1) developed for
each of the thirty firms – firms JOD to WPL

110

Table 5.5-3 Inclusion of variables in the SRD and LRD (log-transformed
version)

111

Table 5.5-4 Combinations of financial variables in the short (SRD)
and long (LRD) run dynamics

113

Table 5.5-5 Diagnostic testing of the statistical models
(log-transformed) for the thirty firms

115

Table 5.6 The best model for each of the 30 firms

117

Table 5.7 Best models, coefficients on variables in the SRD and OLS
of ECT, R2 statistics and RMSE for 4 year and 10 year hold-out
forecasting periods

120

Table 5.8 Classification of firms into ‘best modelling’ categories

121

Table 5.9 Comparison of ‘best’ selected models by market sector

122
xi


Table 5.10 Comparison of untransformed (additive) and
log-transformed (multiplicative) models

126

Table 6.1 Summary of company historical information - BPC

142

Table 6.2 Summary of company historical information - SRP

145

Table 6.3 Summary of company historical information - PMT

148

Table 6.4 Summary of company historical information - AGL

150

Table 6.5 Summary of company historical information - CML

153

Table 6.6 Overall findings for the 30 firms

155

Table 6.7 Summary of model 1 comparison with best selected models

170

Table 6.8 Consistency

171

Table 6.9 Value Relevance

173

Table 6.10 Sufficiency

175

Table 6.11 Comparison coefficient magnitudes with average of
annually estimated ratios

177

Table 6.12 Firms ranked by consistency

178

Table 6.13 Firms ranked by value relevance

179

Table 6.14 Firms ranked by sufficiency

179

xii

List of Figures
Figure 3.1 Models compared for each of the 30 firms in the benchmarking
phase

43

Figure 4.1 Benchmarking phase procedure

77

Figure 5.1 Australian money supply and total credit market debt for the
period of 1950 to 2004

84

Figure 5.2 The Australian All Ordinaries Index for the period of
1950 to 2004

85

Figure 5.3 Australian Foundation Investment Co. Ltd (AFI) market
value and book value

85

Figure 5.4 Macro-economic variables in levels

90

Figure 5.5 Orica Ltd (ORI) model performance additive model

105

Figure 5.6 Permanent Trustee Co. Ltd (PMT) model performance additive
model

106

Figure 5.7 BHP Billiton Model Performance in sample and 10-year hold-out
forecasting period (Model 1)

124

Figure 5.8 Gowings Ltd Performance in sample and 10-year hold-out
forecasting period (Model 1)

124

Figure 5.9 Movements in the growth rate of market value for selected
30 firms

129

Figure 5.10 Movements in the growth rate of book value for selected
30 firms

131

Figure 5.11 Movements in the growth rate of net income for selected
30 firms

133

Figure 5.12 Movements in the growth rate of dividends for selected
30 firms

135

Figure 5.13 Movements in the growth rate of macro-economic variables 137
Figure 6.1 Burns, Philp & Co. Ltd model performance of statistical model
(equation 6.1)

142

Figure 6.2 Southcorp Ltd model performance of real statistical
model (equation 6.2)

145

Figure 6.3 Permanent Trustee Co. Ltd model performance of real
statistical model (equation 6.3)

148
xiii


Figure 6.4 Australian Gas Light Co. Ltd model performance of real
statistical mode (equation 6.4)

150

Figure 6.5 Coles Myer Ltd model performance of real statistical model
(equation 6.5)

153

xiv


Statement of Original Authorship
“The work contained in this thesis has not been previously
submitted for a degree or diploma at any other higher education
institution. To the best of my knowledge and belief, the thesis
contains no material previously published or written by another
person except where due reference is made.”
Signature:
Date:

xv


Acknowledgements
I would like to express my sincere gratitude to Professor Roger Willett, my
principal supervisor. Roger offered his hard work, patience and support
throughout the writing of this thesis.
I would also like to express my thanks to the academic and administration
staff of the School of Accountancy at QUT for their resources, support and
advice. Their encouragement and kindness made me feel most welcome
during my time at QUT. I would also like to acknowledge the financial
support of the QUT scholarship, the QUT Postgraduate Research Award,

and the School of Accountancy Scholarship I gratefully received which
enabled me to undertake this thesis.
My appreciation is also extended to my fellow research students Steve Su,
Eko Swardi, Sabri Hasan, Teruyo Omura and Chun Wei Huang for their
genuine friendship and support. I would also like to thank Dr Elizabeth
Webster of the University of Melbourne for her suggestions regarding share
price collection sources and Dr David Simmonds, CRIF manager, for data
collection assistance.
Finally, I would like to thank my parents, Robyn and John, my brother
Richard and my sister Elizabeth, for their support, encouragement, patience
and understanding over the past three years.

This thesis has been edited.

xvi


Chapter 1
Introduction
1.1

Purpose of the study

The purpose of this thesis is to investigate the dynamic relationship between
market values and accounting numbers for 30 selected firms that have been
listed continuously in Australia for at least 50 years. Studies investigating the
role of accounting information in capital markets began with the pioneering
work of Ball and Brown (1968). This is now one of the most popular research
areas in the accounting literature. There have been numerous studies
investigating this topic, especially in the US, for example, Beaver (1974),

Beaver and Ryan (2000), Ohlson (1990; 1995). This research can be broadly
classified into three main areas, (i) studies of market reaction to newly released
accounting information (Brown, 1970; Brown et al. 1977; Easton, 1991), (ii)
studies of the long-term association between stock returns and accounting
numbers (Bartholdy et al., 2004’ Easton & Harris, 1991; Penman, 1992;) and
(iii) studies devoted to the use of accounting data by investors and to the
impact of market pressure on accounting choices (Ball et al., 2000; Barth &
Clinch, 1998). This study analyses the issue of the nature of the fundamental
long-run relationships between market values of firms and their main
accounting aggregates and the net book value of assets, earnings and
dividends.
This area of research is vital with regard to capital markets because accounting
information is thought to facilitate the prediction of a firm’s future cash flows
and to help the investors assess future securities’ risks and returns. For this
reason, many studies have been conducted during the last three decades
(Kothari 2001; Richardson & Tinaikar, 2003).

1


This study constructs firm-specific models of the relationship between time
series of annual market values and accounting values for 30 selected firms
listed on the Australian Stock Exchange (ASX) from 1950 to 2004. It extends
the previous literature in several ways. First, the value-relevance theme is
adapted to rely more on empirics and less on unproven theoretical
assumptions. Second, the analysis is dynamic (over time) as opposed to the
predominately cross-sectional modelling approach used in prior research.
Third, the research method supplements the econometric analysis of data
with accounts of the history of the firms in the sample, to introduce more
formally the contextual information into the assessment of the market to the

accounting value relationship. Fourth, the study provides information about
the unique Australian economic environment over an extended period of
time.
The selection criteria for the 30 selected firms was based on the firm being
listed on an Australian stock exchange prior to 1955 and remaining listed
continuously for at least 50 years. The dynamics of the annual market value to
the accounting number relationship for the companies are modelled
individually using an Equilibrium Correction Model (ECM) over an extended
period of time (Hendry, 1995). This tests for the existence of a long-run
equilibrium between market and accounting values that is often only either
assumed (Miller & Modigliani, 1961) or inferred on the basis of other
theoretical assumptions (Ohlson, 1995). Value relevance research has been
conducted predominately in the form of testing a specific theory through its
interpretation as an estimated, cross-sectional econometric regression model.
The study contributes to the literature as one of only a few dynamic
investigations into the long-run equilibrium between market and accounting
values pertaining to the Australian data. The dynamics of the relationship are

2


individually modelled as an ECM for each of the 30 firms between 1950 and
2004.

1.2

Relationship to prior research

The existing approaches to company valuation in the literature can be
classified into three types of approaches, industry (analyst), finance and

accounting theory (textbook) and capital market research (CMR). The
research of this thesis is within the context of these three approaches.
At present, little direct evidence on the financial analyst approach to valuation
is published because of the proprietary nature of the information. However,
there are survey and behavioural researches — including Arnold and Moizer
(1984), Barker (1999), Govindarajan (1980), Lee and Tweedie (1981), Previts
et al. (1994) and Yap (1997) — which provide evidence that analysts are
interested in earnings, earnings magnitude, earnings growth and earnings per
share (EPS). Based on anecdotal, survey and behavioural research, the
analysts’ perspective on earnings is that it is of considerable importance in
firm valuations. This variable is frequently investigated in capital market
research (CMR).
Finance and accounting theory (textbook) approaches are widely published
and have been examined in empirical studies in the literature. The usual
starting point in the textbook finance approach is the present value of
expected dividends (PVED). The main disparity in this theory, amongst
others in explaining ‘firm valuation’, is an issue within the literature that is
open to empirical investigation. The inclusion of dividends as a variable in the
data set used to construct the firms’ models permits the consideration of the
validity of the emphasis on the distribution of wealth to shareholders rather
than on the creation of wealth (earnings).

3


In the accounting ‘textbook’ approach, the main valuation model is the
residual income valuation (RIV) model. Within the survey and behavioural
literature, there is little evidence of this model being used in practice by
analysts for firm valuation, although again it appears extensively in textbooks.
The accounting textbook approach, as opposed to the finance textbook

approach, often adopts book value as an anchor for valuation models and is a
key component of the original Ohlson (1995) model.
Ohlson (1995) provided a theoretical structure on the relationship between
the market value of common equity and accounting variables. This seminal
paper was followed by a strong revival of interest by empirical researchers
who re-examined the relationships between firm value and accounting
information using fundamental analysis. There have been numerous empirical
investigations to date of the Ohlson (1995) model using a cross-sectional
approach (Abarbanell & Bernard, 1995; Dechow et al., 1999; Francis et al.,
2000; Frankel & Lee, 1997, 1998; Hand & Landsman, 1998; Penman &
Sougiannis, 1998). However, adopting a cross-sectional approach has
limitations because it ignores the Ohlson model’s time-series nature (Lo &
Lys, 2000; Qi et al., 2000). The first empirical study to investigate the timeseries relationships between market value, dividends, earnings and book value
was by Bar-Yosef et al. (1996). The study examined the lag structure of the
Ohlson model for a sample composed of stationary firms. A number of
recent empirical studies of the Ohlson model have adopted a time-series
approach (Ahmed et al., 2000; Ballester et al., 1999; Callen & Morel, 2000; Lee
et al., 1999; Morel, 1999; Myers, 1999).
Another theoretical perspective on the market accounting value relationship is
provided by Penman (1992), who also argued for a “return to fundamentals”.
Empirical studies that have followed this approach include Abarbanell and
Bushee (1997; 1998), Lev and Thiagragan (1993), Ou and Penman (1989a;
4


1989b) and Piotroski (2000), Stober (1992). Again, the majority of studies
testing the hypotheses generated by Peman’s theory have been cross-sectional.
To date, time-series studies into the relationships between accounting
numbers and market values have been much fewer in number. Examples exist
more often in the finance literature (Schiller, 1981) and more recently in

accounting, for instance, Kothari and Shanken (1997), Qi et al. (2000). Yang et
al. (2000) examined the Australian market in a dynamic study of the
relationship between prices and earnings at the firm level, producing results
that supported the co-integration of prices and earnings. Dynamic
econometric studies of firm level data have also been undertaken by Cooke et
al. (2005), Omura (2005), Suwardi (2004) and Willett (2005). This thesis is
based on a dynamic modelling approach to the fundamental analysis
developed in the latter studies.
The research methods used in this study adopt an empirically-driven,
historical approach to understanding the relationships between book values
and market values in the Australian financial markets. The variables of book
value, earnings and dividends have been incorporated into the valuation
approaches of analysts, finance and accounting textbooks, as well as being
included in both theoretical and empirical studies in the CMR. Both the wider
context of valuation models and the CMR literature provide a motivation for
examining the variables, earnings, book value and dividend relationships to
market values in the firms selected for this study. Econometric techniques are
used to provide the assessment of these relationships, rather than to test a
central, single research hypothesis concerning the relationships. The literature
on the mature economic markets tends to support the conventional
assumptions of capital market research (CMR) such as the Capital Asset
Pricing Model (CAPM), the efficient markets and portfolio theory as being
appropriate when analysing the Australian share market (Kothari, 2001).
5


Nevertheless, there are doubts concerning the validity of the models on which
these findings are based (Willett & Falta, 2007). Following the testing down
approach of Hendry (1995), this study uses econometric models to provide a
parsimonious statistical description of the relationship between market and

accounting values, against which the models suggested by specific theories
can be compared.

1.3

Motivation

The motivation for the thesis is to improve the understanding of the
relationship between market and accounting values in the context of
Australian capital markets. Australia is the world’s eighth largest equities
market by market capitalisation and the second largest in the Asia-Pacific
region after Japan (Crooke, 2003; Morgan Stanley Capital International
(MSCI) World Index). In December 2005, the number of ASX listed
companies was 1,8731 (ASX, 2005). In February 2005, the market
capitalisation of the shares of the domestic companies in Australia was
US$746 billion, the third highest in the Asia Pacific region (NSW DSRD,
2005).
Given the inconsistent findings regarding the relationship between market
value and reported accounting numbers in cross-section research into
fundamentals, it is an open question as to whether the disclosure of
accounting information affects share prices or whether it is irrelevant to the
behaviour of share prices because the market obtains the information through
other sources (Beaver & Dukes, 1973). However, corporate collapses in the
later half of the 1990s and in the first half of the 2000s in Australia2 and
internationally have heightened awareness of the need for improvements in

1 The total number of companies was composed of 1,736 domestic and 71 foreign companies.
2 Ansett Airlines, HIH Insurance, One Tel.
6

transparency and the quality of disclosure in Australian financial statements.
The Federal Government’s formal response3 to these scandals in the political
arena was to detail increases in auditor independence and transparency with
the pursuit of other measures to improve the monitoring of corporate
governance. The Australian Securities and Investment Commission (ASIC)
has announced a new accounting surveillance project directed at areas of
accounting abuse of the type recently uncovered in the US, particularly
capitalised and deferred expenses, recognition of revenue and recognition of
controlled entities and assets. Therefore, there is some interest in investigating
the relationship between market values and accounting values in this context
as well as for purely intellectual reasons. On the basis of the statistical record,
is there observable evidence that the market values of firms are dependent
upon reported accounting numbers? This interest is served in this study by
establishing a better understanding of the relationships between accounting
net asset book values, earnings, dividends and share prices in 30 firms listed
on the Australian Stock Exchange.

1.4

Research question

The previous two sections indicate the broad areas in which the research
question is developed. The main research question is: ‘At the level of the firm,
what is the long-run nature of the relationship between accounting numbers and
market value, certain macro-economic data and reported financial statements
of thirty Australian firms, based on the information drawn from the Australian
Stock Exchange (ASX)?’ The study explores this question through an

examination collected from a variety of sources of archival data supplemented

by historical data in the public domain.

3 In a paper entitled: 'Corporate Disclosure: Strengthening the Financial Reporting Framework'
now know as CLERP 9 (Corporate Law Economic Reform Program, Chapter 9).
7


1.5

Significance of the study

This study follows the tradition of CMR research by using econometric
techniques to investigate and describe the relationship between market and
accounting data. However, it extends present knowledge of the relationship
between market values and accounting information in novel ways. In contrast
to prior research, the nature of this project is a general case study
investigation into the nature of the dynamic relationship between market and
accounting values in 30 different firms. The econometric approach and
manner in which qualitative and quantitative methods are used to address the
research question are unusual in the context of the CMR literature.
Hendry’s (1995) general-to-specific method of testing econometric models is
employed. Consequently, within a general framework guided by economic
theory, the approach is more empirically driven than is the usual ‘positivist’
approach taken when examining similar questions in the CMR. Furthermore,
the econometric analysis is carried out in a broader qualitative, contextual
assessment of the history of each firm. Much of the CMR is narrowly focused
on the statistical analysis of the sample used, often without sufficient attention
being given to the issues of the model specification and also without enough
consideration being directed towards understanding the broader context
within which the statistical results are realised. Other researchers

contemporaneously conducting projects using a similar method with the data
for other countries include (i) Suwardi (2004) in a ten-year study of
Indonesian firms using quarterly financial reports, (ii) Cooke et al. (2005) and
Omura (2005) examining five Japanese firms over a 50-year period and (iii)
Willett and Falta (2007) modelling 30 US firms over a 50-year period. The
findings from this thesis, therefore, provide important and unique empirical
results that can be usefully compared with the results from similar models
applied to data from other countries, allowing for the consistency of the
8


approach and the cumulative development of understanding required for the
growth of scientific knowledge

1.6

Outline of the thesis

The remainder of the thesis is organised as follows. Chapter 2 reviews the
literature relevant to the research question. The focus of the chapter is the
approaches to company valuation. Currently, three different approaches exist
including, the industry (analyst) approach, the finance and accounting theory
(textbook) approaches and the capital market research (CMR) literature
approaches. Each approach advocates the inclusion of different variables for
a firm’s valuation. This thesis is set within these competing valuation
approaches.
The theoretical framework for the research methods used is explained in
Chapter 3, which includes a discussion of two broad issues from the current
CMR, the inadequacy of the method and the inadequacy of the theory. The
former is approached in discussions of the variable identification, functional

form, dynamic specification, replication for benchmarking and the model
selection strategy based on the benchmarking of the final ‘best’ model. A
detailed outline of the benchmarking process is presented. Benchmarking is
used here, as in Willett (2005), to describe the phase of testing during which
the statistical models are compared based on the forecasting performance
with a priori models generated on the basis of theory and the prior literature.
The latter issue is discussed in the examination of the economic theory at the
foundation level of the CMR.
Chapter 4 describes the research methods used in the study. Details of the
selection and the composition of the study sample are given with a
description of the variables suggested from prior literature and the sources

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