Can Fixed Asset Liquidation Values Predict Stock Market Returns?

Abstract

This study raises the issue of current value-based measurements of long-term assets from a different perspective. The usefulness of the liquidation value of a firms fixed assets for decision making purposes (through value-relevance) is demonstrated. By showing a relationship between the liquidation value of a firms fixed assets and the firms market return, this study will contribute to the existing accounting and finance literature by raising the issue of current value based measurements of long-term assets from a different perspective. Additionally, it provides additional evidence for consideration of long-term asset valuation in todays context of the planned United States GAAP convergence with International Financial Reporting Standards (IFRS). IFRS allows the use of current value and the liquidation value of a firms fixed assets is one measure of current value.

This study examines the relationship between the liquidation values of a firms fixed assets and the firms stock market returns. The significance of this relationship is demonstrated by comparing it with the relationship between the book value of a firms fixed assets and the firms stock market returns. A stronger, or enhanced, relationship for liquidation values to stock market returns indicates its usefulness for decision making purposes.