The Relationship of Earnings and Book Values to Equity Values: Evidence from Turkey

In this study, we examine factors associated with equity valuation in a newly emerging market, Turkey.  In the United States and other developed countries, research indicates that both earnings and book value are important predictors of equity valuation. In Turkey, earnings appear to have information content, but earnings appear to be declining in importance over time. Book value adjusted for inflation has a stronger association with equity values. In the inflationary and risky environment of Turkey, where future value of earnings is quite uncertain, investors may be paying less attention to earnings. Our study also indicates that, overall, earnings and inflation-adjusted book values combined virtually explain almost 75 percent of the variation in equity prices. This is much higher than results using U.S. data where the maximum R2 for pooled data is 15 percent.