Accounting for investments and the relevance of losses to firm value

Hai Wu
Macquarie University
Australia

Neil Fargher
Macquarie University
Australia

Sue Wright
Macquarie University
Australia

Abstract:
Recent research has documented investment in research and development as a key driver of the market value of currently unprofitable firms (hereafter loss firms) in a knowledge-based economy. We broaden this argument to consider the influence of the accounting for investments in general on the relation between current profitability and firm value for loss firms. Specifically, in the context of a resource-based economy, we find that exploration costs, cash flow measures of investment, and research and development costs help to explain the value of loss firms and reduce the negative relation between current profitability and firm value.