When are Profitable Earnings Low Enough to Trigger a Liquidation Option?

Abstract

The objective of this study is threefold. Our primary objective is to determine the point at which earnings become low enough to trigger a liquidation (abandonment) option during the 1998 fiscal year on the New York Stock Exchange and the Nasdaq. Second, we investigate whether that earnings level is intertemporally stable by investigating the valuation significance of earnings and book value during two pooled time periods from 1994 to 1998 and from 1989 to 1998. Third, we seek to determine whether the decreased valuation significance in earnings is associated with a simultaneous increase in the valuation significance of book value during all three time periods examined. Key Words: Earnings; Book value of equity; Valuation; Abandonment option