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Probability of loss reversal in Australia

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  • Hai Wu

Abstract

Investors in loss firms assess the likelihood of these firms reverting to profit (i.e. loss reversal). This research examines the factors useful for predicting future loss reversal in the Australian market. Specifically, it focuses on loss firms’ investment activities, in addition to factors examined in previous US literature. The results show that when the level of investment in specialised assets, such as mineral exploration and research and development, is high relative to fixed-asset investment, future loss reversals are less likely to occur. In contrast, a high level of fixed-asset investment increases the likelihood of future loss reversal. These results hold implications for loss-firm valuation. Further analysis documents a positive association between the ex-ante probability of loss reversal and future abnormal stock returns for loss firms with a weak information environment. Investors in these loss firms could benefit from the findings of this study.

Suggested Citation

  • Hai Wu, 2017. "Probability of loss reversal in Australia," Australian Journal of Management, Australian School of Business, vol. 42(4), pages 560-582, November.
    • Handle: RePEc:sae:ausman:v:42:y:2017:i:4:p:560-582
    DOI: 10.1177/0312896216673411
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    References listed on IDEAS

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    More about this item

    Keywords

    Accounting loss; investment activities; loss reversal; valuation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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