The Effect of Firm Life Cycle on the Relationship between Market Stock Return and Accounting Earnings, Losses and Book Value per Share: Evidence from Jordan

Abstract

This study aims at examining whether the relationship between market stock return and earnings (losses) per share and book value per share varies according to each and both of the sign of net income and the stage the firm is going through within its life cycle. The study used a sample of 33 industrial public shareholding companies listed in Amman Stock Market (164 observations) during the period 2011-2019.

To achieve the objectives of the study, the researchers executed a number of simple -and multiple- regression models of the returns-earnings (losses) and book value to examine the relationship from various dimensions: (1) the explanatory power of earnings (losses) per share, (2) the explanatory power of book value per share, (3) the incremental explanatory power of book value per share over that of earnings (losses) per share. The models were executed for various sub-samples constructed according to the sign of net income and the stage in which the company is going through within its life cycle, separately and combined.

The results of the sub-samples which were constructed based on both the sing of net income and the stage which the company is going through revealed the following: (1) earnings per share and book value per share have no information content for profitable companies in the introduction and growth stages, (2) the main explanatory variable for market stock return for profitable companies in the maturity stage is earnings per share, (3) the only explanatory variable for market stock return for profitable companies in the shake-out and decline stages is earnings per share, (4) losses per share and book value per share separately have no information content for losing companies in the introduction and growth stages, (5) losses per share and book value per share have information content when both are entered together in the model, (6) only book value per share has information content for losing companies in the maturity stage, (7) loss per share and book value per share separately and together have no information content for losing companies in the shake-out and decline stages.

The results suggest that the reasons behind the low explanatory power of the relationship between market stock return and earnings per share are the presence of losses, the failure to take into account the stage in which the company is going through in its life cycle and the failure to consider the book value per share in the model of the relationship, which leads to an error in the specification of the relationship, especially if the result of operations is a loss. These results are expected to assist stakeholders in making rational decisions and recommendations.