Managerial Finance

Purpose – This study aims to test empirically the validity of the accounting valuation model that is based on earnings and book values for loss-reporting firms under a conservative accounting regime.

Design/methodology/approach – The empirical tests are performed by employing returns models on data derived from non-financial firms listed on the Athens Stock Exchange for the period 1992-2000.

Findings – The empirical results suggest that there is no unique concept of income, which is applicable, for valuation purposes, in all circumstances. Total income may be the appropriate income concept to use for the valuation of profit reporting firms but not for loss-reporting ones; for loss-reporting firms, ordinary income appears to be a more useful concept for valuation purposes. Extraordinary income was also found to be value relevant. Further, different versions of the accounting valuation model appear to be more relevant for different groups of firms (groups defined in terms of various firm characteristics, such as: size, growth opportunities and riskiness.

Practical implications – The study examines the informational content of the various earnings and loss items in the income statement and provides conclusions that are useful for standard setters, accounting policy makers and market participants.

Originality/value – It provides further evidence on the value relevance of losses, as opposed to that of earnings. It coincides with the development of a new project initiated by the International Accounting Standards Board, i.e. “Reporting Comprehensive Income”, concerning the content of the income statement. The analysis is carried in an accounting environment that adopts only historic cost accounting for the recording and measurement of assets and liabilities, revenues and expenses.