How should the value relevance research employ book value of equity ?
Künye
ERTUĞRUL, M. (2020). How Should the Value Relevance Research Employ Book Value of Equity?. İşletme Araştırmaları Dergisi, 12(2), 2031-2039.Özet
Purpose – This study analyses how the mechanical interdependency affects the value relevance
inferences by considering the Price Model.
Design/methodology/approach – As the Price Model employs reported earnings together with
book value of equity (BVE), it induces a mechanical interdependency since earnings are partially
integrated to BVE via the net income available to owners of parent item. We suggest researchers
subtract this item from BVE prior to analyses. We perform analyses by employing the Price Model
with the unadjusted (or reported) version BVE and the Price Model with the adjusted version of
BVE.
Findings – The Price Model with unadjusted BVE figures generates value irrelevant earnings
figures which is contrary to expectations. However, as per our suggestion, after adjusting BVE for
the net income available to owners of parent item, earnings become value relevant.
Discussion – Although no mechanical interdependency does exist at conventional statistical
significance levels, researchers should know data they work in value relevance studies as both
independent variables of the Price Model is partially integrated which may yield incorrect value
relevance inferences.