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The Value-Relevance of Losses: the Spanish Case
Araceli Mora Enguídanos and Pablo J. Vázquez Veira |
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Market-based Accounting Research (MBAR) has not already properly addressed the price-earnings relation for loss firms. Moreover, the extant evidence is full of contradictions. Zhang’s (2000) model provides a new theoretical framework to discuss this issue. However, we believe this model is partially limited: it predicts that every single loss firm is valued at its liquidation value. In this paper, we develop an extension of the model that avoids this limitation. The mainly predictions that could be derived from this extension are: (1) losses are not value-relevant, (2) if a loss firm is not supported by investors, it will be valued at its liquidation value, and (3) if a loss firm is supported by investors, it will be valued at its continuation value. We contrast our predictions using a sample of Spanish listed firms for the period 1991-2004. The results confirm the hypotheses.
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