Download or read book Conservatism in Residual Income Models written by Pengguo Wang and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we develop a framework for evaluating the impact of conservative accounting on the structure of residual income models of equity valuation. We explore specific examples of both unconditional and conditional conservatism and observe a common mathematical structure. We proceed to generalise our model and identify the joint dependency of conservatism and the persistence of abnormal earnings on the weights attached to book values, earnings and dividends. We are able to show theoretically the likely numerical impact of conservatism on price-earnings ratios and under valuations produced by residual income models. We investigate empirically the interaction between conservatism and persistence and find they accord well with the theory developed. We briefly discuss the implications for testing of the effect of conservatism on valuation and linear information dynamics.

Download or read book Valuation Weights and Accounting Conservatism written by David J. Ashton and published by . This book was released on 2009 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we develop a general framework for evaluating the impact of conservative accounting on the structure of residual income models of equity valuation. This affords a theoretical understanding of the signs and sizes of the valuation weights observed in regression studies of the relationship between prices, book values, earnings and dividends. We proceed to generalize our model of conservatism and are able to show theoretically the likely numerical impact of conservatism on book values, price-earnings ratios and under valuations produced by residual income models. The analysis also affords an understanding of the limitations of empirical investigations of conservatism using linear information dynamics and hence to explain the failure of many such studies to detect conservatism.

Download or read book Conditional and Unconditional Conservatism written by Julia Nasev and published by Springer Science & Business Media. This book was released on 2009-12-28 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: Julia Nasev examines the impact of conservative accounting numbers on valuation estimates and on real economic decisions such as cost stickiness.

Download or read book Conservative Accounting and Linear Information Valuation Models written by Young-Soo Choi and published by . This book was released on 2005 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior research using the residual income valuation model and linear information models has generally found that estimates of firm value are negatively biased. We argue that this could result from the way in which accounting conservatism effects are reflected in such models. We build on the conservative accounting model of Feltham and Ohlson (1995) and the Dechow, Hutton and Sloan (1999) (DHS) methodology to propose a valuation model that includes a conservatism-correction term, based on the properties of past realizations of residual income and other information. Other information is measured using analyst-forecast-based predictions of residual income. We use data comparable to the DHS sample to compare the bias and inaccuracy of value estimates from our model and from models similar to those used by DHS and Myers (1999). Valuation biases are substantially less negative for our model, but valuation inaccuracy is not markedly reduced.

Download or read book Conservative Accounting and Finite Firm Life written by James N. Myers and published by . This book was released on 1999 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Residual income (RI) valuation involves discounting estimated future RI over the entire life of the firm. Because accounting is conservative, price is higher than book value for the average firm, creating a large accounting gain (terminal income) at delisting for most firms. However, this terminal income is hidden from researchers because it is not included in archival databases such as Compustat. Although most valuation models posit infinite firm life, the median firm survives approximately ten years. Terminal income is omitted from recent archival valuation research and this omission creates biased valuation estimates. This explains why studies that use the residual income valuation model to estimate stock price understate stock price on average. The results suggest that the estimation of future price/book premiums is an important component of RI valuation and present a limitation of using accounting numbers to estimate firm value without reference to price.

Download or read book Conservatism Growth and the Role of Accounting Numbers in the Equity Valuation Process written by Steven J. Monahan and published by . This book was released on 2000 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study extends our understanding of the impact that conservative accounting has on the equity valuation role of firms' summary accounting numbers. In particular, I evaluate the effect of conservative accounting for research and development (Ramp;D) and past growth in Ramp;D on the relation between aggregate earnings (deflated by price) and contemporaneous stock return and the usefulness of earnings and equity book values for developing estimates of equity market value. I find that the capitalization of Ramp;D improves the value relevance of aggregate earnings only for firms with high past growth in Ramp;D. Moreover, the deleterious effects of the conservative treatment of Ramp;D on the value relevance of estimates of equity market value based on the discounted residual income model are increasing in the level of past growth in Ramp;D. My results contribute to the extant literature by providing more precise evidence regarding the magnitude of the benefits (in terms of value relevance) associated with capitalizing Ramp;D costs. In addition, my results provide us with a deeper understanding of how accounting measurement rules and firms' economic fundamentals interact to determine the valuation role of firms' financial statement numbers.

Download or read book Essays on the Residual Income Valuaiton Model written by Qiang Cheng and published by . This book was released on 2002 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book What Determines Residual Income written by Qiang Cheng and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the determinants of residual income scaled by book value of equity, i.e., abnormal return on equity (ROE), by analyzing the impact of value-creation (economic rents) and value-recording (conservative accounting) processes on abnormal ROE. I rely on economic theories to characterize economic rents and develop an empirical measure - the conservative accounting factor - to capture the effect of conservative accounting. As expected, industry abnormal ROE increases with industry concentration, industry level barriers to entry, and industry conservative accounting factors. Also as expected, the difference between firm and industry abnormal ROE increases with market share, firm size, firm level barriers to entry, and firm conservative accounting factors. Integrating these determinants into the residual income valuation model significantly increases its explanatory power for the variation in the market-to-book ratio.

Download or read book Revenue Investment Accounting Conservatism and the Valuation of Loss Making Firms written by John McCallig and published by . This book was released on 2004 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: The proportion of listed firms reporting accounting losses has increased greatly since the 1970s. The perception that accounting losses always indicate a loss of economic value is no longer widely held. It is now accepted that many loss making firms report losses because of investments that cannot be capitalized under present accounting rules. Charges against income caused by investments are called 'revenue investments' in this study. Two aspects of the valuation of loss making firms are investigated. Firstly, a method of distinguishing firms that have made revenue investments from firms that are suffering 'real' economic losses is developed. The findings show that loss making firms can be categorized, and that the accounting and economic characteristics of firms differ over these categories. Secondly, the impact of revenue investment on the residual income valuation model is examined. The findings show that revenue investment means that book value is not sufficient to specify the stream of normal returns on the firm's investments. The Ohlson (1995) model is used to show that decomposition of residual income leads to a better valuation model and that current and past losses are associated with value creation for firms that practice revenue investment.

Download or read book Residual Income Based Equity Valuation written by Young-Soo Choi and published by LAP Lambert Academic Publishing. This book was released on 2010-09 with total page 280 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following the seminal theoretical work of Ohlson (1995), many researchers have tried to investigate the linear information dynamics (LID) model's validity empirically. However, empirical applications of the LID approach to residual income (RI)-based equity valuation have produced estimates of firm value that are substantially lower on average than corresponding observed market values. This book augments the Ohlson model by incorporating residual income and 'other information' intercepts into the original linear information dynamics, in order to capture the impact of the intercept terms on the residual income forecasts and firm values. I argue that the large negative bias in LID-based value estimates might be attributable to failure to deal fully with the effects of conservative accounting in projecting residual income. The main objective of the book is thus to examine whether the 'intercept-inclusive' LID model produces more reliable value estimates than the extant RI-based valuation models. I also address a potentially important issue of the different applicability under different conditions of different RI-based valuation models.

Download or read book Implementing Residual Income Valuation with Linear Information Dynamics written by James N. Myers and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Residual income (RI) valuation is a method of estimating firm value based on expected future accounting numbers. This study documents the necessity of using linear information models (LIMs) of the time series of accounting numbers in valuation. I find that recent studies that make ad hoc modifications to the LIMs contain internal inconsistencies and violate the no arbitrage assumption. I outline a method for modifying the LIMs while preserving internal consistency. I also find that when estimated as a time series, the LIMs of Ohlson (1995) and Feltham and Ohlson (1995) provide value estimates no better than book value alone. By comparing the implied price coefficients to coefficients from a price level regression, I find that the models imply inefficient weightings on the accounting numbers. Furthermore, the median conservatism parameter of Feltham and Ohlson (1995) is significantly negative, contrary to the model's prediction, for even the most conservative firms. To explain these failures, I estimate a LIM from a more carefully modeled accounting system that provides two parameters of conservatism (the income parameter and the book value parameter). However, this model also fails to capture the true stochastic relationship among accounting variables. More complex models tend to provide noisier estimates of firm value than more parsimonious models.

Download or read book Valuation Approaches and Metrics written by Aswath Damodaran and published by Now Publishers Inc. This book was released on 2005 with total page 102 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.

Download or read book Financial Statement Analysis and Security Valuation written by Stephen H. Penman and published by . This book was released on 2010 with total page 754 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation is at the heart of investing. A considerable part of the information for valuation is in the financial statements.Financial Statement Analysis and Security Valuation, 5 e by Stephen Penman shows students how to extract information from financial statements and use that data to value firms. The 5th edition shows how to handle the accounting in financial statements and use the financial statements as a lens to view a business and assess the value it generates.

Download or read book The Theory and Measurement of Business Income written by Edgar O. Edwards and published by Univ of California Press. This book was released on 1973 with total page 344 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Estimating the Cost of Capital Implied by Market Prices and Accounting Data written by Peter Easton and published by Now Publishers Inc. This book was released on 2009 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt: Estimating the Cost of Capital Implied by Market Prices and Accounting Data focuses on estimating the expected rate of return implied by market prices, summary accounting numbers, and forecasts of earnings and dividends. Estimates of the expected rate of return, often used as proxies for the cost of capital, are obtained by inverting accounting-based valuation models. The author describes accounting-based valuation models and discusses how these models have been used, and how they may be used, to obtain estimates of the cost of capital. The practical appeal of accounting-based valuation models is that they focus on the two variables that are commonly at the heart of valuations carried out by equity analysts -- forecasts of earnings and forecasts of earnings growth. The question at the core of this monograph is -- How can these forecasts be used to obtain an estimate of the cost of capital? The author examines the empirical validity of the estimates based on these forecasts and explores ways to improve these estimates. In addition, this monograph details a method for isolating the effect of any factor of interest (such as cross-listing, fraud, disclosure quality, taxes, analyst following, accounting standards, etc.) on the cost of capital. If you are interested in understanding the academic literature on accounting-based estimates of expected rate of return this monograph is for you. Estimating the Cost of Capital Implied by Market Prices and Accounting Data provides a foundation for a deeper comprehension of this literature and will give a jump start to those who have an interest in these topics. The key ideas are introduced via examples based on actual forecasts, accounting information, and market prices for listed firms, and the numerical examples are based on sound algebraic relations.

Download or read book Clean Surplus written by Richard P. Brief and published by Routledge. This book was released on 2013-09-13 with total page 324 pages. Available in PDF, EPUB and Kindle. Book excerpt: First published in 1996. The relationship between the present discounted value of future cash flows and discounted excess earnings should be viewed as a mathematical property of a double-entry book[1]keeping system based on clean surplus. The purpose of this anthology is to facilitate future research by highlighting these historical developments and by showing how more recent theoretical and empirical research fits into the earlier history. The book is divided into four sections: historical overview; analytical properties of clean surplus; the theory of the clean surplus equation; and empirical implications.

Download or read book Business Analysis and Valuation written by Sue Joy Wright and published by . This book was released on 2014 with total page 720 pages. Available in PDF, EPUB and Kindle. Book excerpt: Business Analysis and Valuation has been developed specifically for students undertaking accounting Valuation subjects. With a significant number of case studies exploring various issues in this field, including a running chapter example, it offers a practical and in-depth approach. This second edition of the Palepu text has been revitalised with all new Australian content in parts 1-3, making this edition predominantly local, while still retaining a selection of the much admired and rigorous Harvard case studies in part 4. Retaining the same author team, this new edition presents the field of valuation accounting in the Australian context in a clear, logical and thorough manner.