Negative Earnings In International Equity Valuation

Abstract

The openness of international capital markets has encouraged investors to look beyond their own national boundary for investment opportunities. Foreign direct investment flow has increased in recent years around the world in all major and emerging markets. International equity valuation, as a result, has gained much attention from practitioners and academic researchers alike. Motivated by evidence that the price-earnings relation is not homogeneous across profit and loss firms and by the growing body of international accounting literature that documents and compares the value relevance of earnings and book value across national boundaries, this study illustrates the potential impact of negative earnings (loss firms) on comparing the relative value relevance of earnings and book value across national boundaries. Our results show that removal of negative earnings observations (1) changes the total value relevance of earnings and book value combined (2) changes the relative value relevance of earnings and book value within each country in our study, and (3) changes the relative incremental value relevance of earnings (book value) between the two countries in the study.