| ABSTRCT | This study discusses two issues on loss firms in Taiwan. First, we compile the trend, frequency and duration of loss firms for Taiwan’s listed firms for the years between 1991 and 2008. We find that firms with reported losses become more frequent in recent years. The longer the firm’s loss history is, the lower probability the firm will earn profit in the following year. We also find that losses can persist for a long time for some of the listed firms in Taiwan.Second, we examine the earnings information content in loss firms in Taiwan from 1981 through 2008. In the first part, we use “basic-earnings valuation model” to study the difference of the information content of earnings between loss firms and profit firms. In the second part, in order to understand the information content in sale-based earnings, we use “sales-based earnings valuation model”, which is developed by Jenkins (2003), to evaluate loss firms. We then compare which model is suitable for valuation of loss firms, the “basic-earnings valuation model” or the “sales-based earnings valuation model”. In the final part of the study, we add survival (bankruptcy) probability to test the market’s ability to assess the loss firms’ survival (bankruptcy). The empirical findings are: market uses reported earnings to assess profit firms, and it uses equity book value to evaluate loss firms. This result implies that profit firms and loss firms have different information content in earnings, and the sales-based earnings factor contains information content for loss firms. Also, sales-based earnings valuation model is more suitable for loss firms than for profit firms. This means that income statement information still has information content for loss firms. Finally, when using sales-based earnings (equity’s book value) to determine stock prices, investors would simultaneously consider loss firms' survival probability (probability of bankruptcy).
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