Accounting data and asset valuation: Theory

Firms and divisions which are not traded on organized exchanges are often valued without the benefit of market data. Accounting data is used instead. One suggested approach is to use accounting beta as a proxy for market return beta. In the context of the Arbitrage Pricing Theory, we provide a theoretical justification for such a procedure. Our results provide a set of sufficient conditions so that return betas and accounting betas are equal. Our results also suggest a general methodology for evaluating projects and untraded firms using accounting data. The method underlying the derivation here is very general and can be applied in deriving testable restrictions between fundamentals, broader in context than that of accounting variables.