Earnings Momentum,Adaptation Value,and Nonlinearities in the Valuation of Chinese Equity Stocks |
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| Authors: | Yizhe Dong Martien Lubberink Diandian MA Mark Tippett |
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| Institution: | 1. The Business School, University of Edinburgh;2. The School of Accounting and Commercial Law, Victoria University of Wellington;3. The Graduate School of Management, University of Auckland;4. The University of Sydney Business School |
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| Abstract: | 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. |
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| Keywords: | Book value Earnings momentum Principal component Real option |
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