Clean surplus accounting: Value relevance of book value and earnings

The accounting measures of earnings and book value are the most important numbers generated from financial statements. There has been much work based on the earnings of a company relative to the market value of that firm. However, research regarding book value and firm valuation has not been as great until the recent theoretical work of Ohlson (1989) and the clean surplus accounting method. This work links accounting book value with accounting earnings in the valuation model.; Further work by O'Hanlon (1996) suggests that the value relevance of security returns is dependent on both the level of earnings returns and the time series properties of earnings based upon book value. Book value is determined by clean surplus accounting. It is these two measures of earnings and book value in a clean surplus condition which may be used for security valuation purposes.; This dissertation study attempts to provide empirical evidence of the value relevance of accounting earnings based upon book value in a clean surplus condition. A portfolio selection method will be incorporated using a return on equity ratio. Returns are accounting earnings and equity is book value both of which are in a clean surplus condition. The level and time series properties of the ratio will be measured against total returns to test for value relevance.