Premium
Earnings Momentum, Adaptation Value, and Nonlinearities in the Valuation of Chinese Equity Stocks
Author(s) -
Dong Yizhe,
Lubberink Martien,
MA Diandian,
Tippett Mark
Publication year - 2019
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12145
Subject(s) - earnings , valuation (finance) , equity (law) , economics , cash flow , financial economics , investment value , value (mathematics) , investment (military) , market value , enterprise value , monetary economics , econometrics , business , finance , cash , mathematics , statistics , politics , political science , law
We demonstrate that when the variables comprising a firm's investment opportunity set depend on their past values then the present value of the cash flows the firm expects to earn will be stated in terms of the levels and the momentum of the affected variables. It is also shown that the market value of a firm's equity is comprised of the present value of the cash flows it expects to earn from operating under its existing investment opportunity set plus the value of the real options the firm possesses to modify or even completely change its existing investment opportunity set. Our empirical analysis, based on both Chinese and US data, shows that earnings momentum and the adaptation and growth options typically available to firms all appear to have a significant impact on equity prices.