Accounting reports based on generally accepted accounting principles capture only some of a firm's value-relevant characteristics and events. Other characteristics and events produce economic assets which are not immediately measured or captured in reported earnings or assets. This study investigates how economic assets affect the relations between market and book value and between market price and earnings. Based on the industrial economic and strategic management literatures I identify four potential economic assets--seller competition, buyer power, entry barriers, and product differentiation. Overall, findings indicate that the market values at a higher level the normal and abnormal earnings of firms with high levels of each of these assets. Specific results suggest that the contribution of the assets to firm value depends on the sign of abnormal earnings, on the omitted economic assets of the industry, and on the presence of other omitted assets. Generally, the incremental effects of the assets are greatest for firms experiencing positive abnormal earnings. However, product differentiation effects are larger in the presence of negative abnormal earnings. Consistent with strategic management evidence, the evidence shows that within industries, the market differentiates between firms possessing high levels of market share, entry barriers, and product differentiation relative to industry members possessing low levels of the same assets. When subsets of the four economic assets are combined, further differences in the existence and magnitude of the asset effects are discovered. The results suggest contextual and nonearnings information is necessary to understand the roles of traditional accounting value indicators such as book value and earnings.
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