The value relevance of accounting variables and analysts’ forecasts

Abstract

PurposeThis paper seeks to address the value relevance of summary accounting measures and fundamental income statement variables in the market valuation of biotech firms.Design/methodology/approachA biotech firm's stock price was related to its underlying financial accounting variables. Using the Ohlson model, the linear function of book value and earnings was employed, and the basic model was augmented with additional accounting variables. These accounting variables may provide information relevant for forming an approximation on the present value of expected future abnormal earnings.FindingsResults show non‐linearities in the pricing of accounting variables Both book value and earnings are value relevant, but positive earnings are positively priced while negative earnings are negatively priced. R&D spending and selling, general and administrative expenses are also priced as assets for loss‐reporting firms, and as expenses for profit‐reporting observations. Including analysts’ forecasts of future earnings and long‐term growth rate in the model results in an insignificant increase in the explanatory power of the regressions.Research limitations/implicationsFuture research could attempt to examine the role of non‐financial variables which can proxy for the soft variables and intangibles like strategic alliances and product pipeline. Decomposing revenue into product sales, interest income and collaborative research revenue may further enhance our understanding on the determinants of the market value of biotech stocks.Originality/valueThis paper provides insights into the valuation of biotechnology stocks. Results show non‐linearities in the pricing of summary accounting measures and fundamental income statement variables.