The relationship between market value and book value for five selected Japanese firms

Abstract

Studies of the value relevance of accounting number in capital market research are consistent with the simple view that, in equilibrium, book values are equal to or have some long-term relationship with market values, and that market returns are related to book returns.

This dissertation examines the value relevance of annually-reported book values of net assets, earnings and dividends to the year-end market values of five Japanese firms between 1950 and 2004 (a period of 54 years). Econometric techniques are used to develop dynamic models of the relationship between markets, book values and a number of macro-economic variables. In constructing the models, the focus is to provide an accurate statistical description of the underlying relationships between market and book value. It is expected that such research will add to the body of knowledge on factors that are influential to Japanese stock prices.

The significant findings of the study are as follows: 1) well-specified models of the data generating process for market value based on the information set used to derive the models are log-linear in form. Additive, linear models in untransformed variables are not well-specified and forecast badly out of sample; 2) the book value of net assets has relevance for market value in the five Japanese firms examined, in the long run.