Equity valuation of currently unprofitable Australian companies : the impact of distress, investment intensity, and accounting conservatism

Abstract

Companies report accounting losses under different circumstances. In the absence of positive accounting profits as a measure of value creation, investors are likely to focus on different factors when valuing companies with different characteristics. This thesis examines how three firm characteristics - distress risk, investment intensity, and accounting conservatism - affect investors' weighting of specific valuation factors for unprofitable companies in Australia. The thesis finds that market value of equity is more sensitive to liquidation value when valuing highly distressed unprofitable companies. The level of investment intensity positively affects the valuation weight on measures of potential growth options. With companies that exhibit a high level of accounting conservatism, cumulative accounting reserves have a higher influence on equity value. These results suggest that investors do not consider currently unprofitable companies as a homogenous group, but adjust their weighting on specific valuation factors according to variations in levels of distress risk, investment intensity, and accounting conservatism. Show more