24 3 Variance measure is a proxy which revealed that an option will
become more valuable if the use of variability to estimate the size of the growing options such as return variability of the underlying assets
increase. This study will use a proxy of investment where the investment
proxy may indicate a high level of investment activity is positive. Companies with high IOS assume will have high investment anyway
Hasnawati, 2005. Kallapur and Trombley 1999 said that ratio capital expenditure to asset as the IOS proxy has positively correlated with
growth.
2.5 Relation between investment, earnings and equity value
This section explains cross-sectional differences in the behavior of the valuation function. The analysis so far shows that value depends on
anticipated future investment, which it turn depends on efficiency and growth potential Zhang, 2000. According to Burgstahler and Dichev 1997, equity
value is a function of both earnings and book value. It means that to determine the equity value we need earnings where the earnings can provide
measure of the value of the firm’s resources. When the earnings of the firm’s are increasing, it will positively affect the market value Burgstahler and
Dichev, 1997. This situation makes the investor interested to do the investment and also can make the opportunities for the investment.
25 Equity value is convex in earnings, especially for low-efficiency firms
and growth firms Zhang, 2000. If the company’s earnings increase, the possibility of the company to continue running the business and operations
will also increase. This rise is also expected to increase future earnings, which could also affect the equity value and earnings relations.
Based on Chen and Zhang 2007 previous research, profitability-related information is more important in explaining price movements than is scale-
related information. Their research also proved that their accounting-based model explaining cross-sectional price movement. This information can help
the investor to search information about fundamental characteristics of the firms. After the investor know about the firm’s characteristic, it would be
better for them to decide the investment for the firm’s. This situation automatically will increase the investment of the firm’s which could be led to
rise in operation activity and it will goes to the earnings. In the end after they know that the firm’s has positive earnings, the equity value will increase and
it would be possible to attract the investor. The increases in investment are expected to have positive effect with the relation of equity value and earnings.
Based on assessment that identified earlier, this study will analyze the effect investment growth and the relation between equity value and earnings
on all listed companies in Indonesia Stock Exchange in the year 2008 – 2011. The research model which proposed in the following figure is a conceptual
framework and as a line of thought in testing hypothesis.
26 Picture 2.1
2.6 Previous Research
