Clean Surplus Residual Income And Earnings Based Valuation Models PDF Download
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Author | : John O'Hanlon |
Publisher | : |
Total Pages | : |
Release | : 1999 |
Genre | : |
ISBN | : |
Download Clean Surplus Residual Income and Earnings Based Valuation Models Book in PDF, ePub and Kindle
Motivated by the fact that residual income based models of the link between the value of equity capital and the outputs of accrual accounting recently appearing in the literature have been based on particular assumed classes of residual income time series process, this paper presents a general residual income based expression for the value of equity capital which allows for clean surplus residual income to be generated by any class of ARIMA time series process. It shows that other models appearing in the literature are re-arrangements of special cases of this general expression. Further, motivated by the possibility that unscaled residual income data might plausibly exhibit explosive characteristics which would make it inappropriate to attempt to fit ARIMA models, a general expression for the value of equity is presented in terms of residual income scaled by book value. Re-arrangements of a number of simple special cases of this expression are explored. It is shown that, depending upon the time series properties of the scaled residual income measure, various combinations of the mean Accounting Rate of Return, the current level of Accounting Rate of Return, the current first difference of Accounting Rate of Return and a lagged Market to Book term can appear in accounting based models of the value of equity.
Author | : John O'Hanlon |
Publisher | : |
Total Pages | : |
Release | : 2000 |
Genre | : |
ISBN | : |
Download The Time Series Properties of the Components of Clean Surplus Earnings Book in PDF, ePub and Kindle
This paper seeks to advance the practical application of theoretically grounded accounting based equity valuation models which use the concept of earnings persistence. It does so by employing an empirically tractable development of the clean surplus residual income based valuation models that appear in the literature as the basis for an empirical investigation of the time series properties of components of the clean surplus earnings of UK companies. The paper uses a general expression of the value of equity capital in terms of residual income scaled by book value to show that clean surplus Accounting Rate of Return (ARR) is relevant in a valuation context if the series has a mean which differs from the cost of equity and/or there is time series dependence in the series. It then uses data drawn directly from the income statements and reserve notes of 181 UK companies over 25 years to seek evidence regarding the mean values of the disaggregated components of clean surplus ARR in the UK both in aggregate and across sectors. Then after using the general expression to provide a classification of ARR series according to four classes of time series process each of which suggests the appropriateness of a different valuation model employing ARR variables (mean level first difference) the paper provides evidence on the time series properties of the disaggregated components of clean surplus ARR both in aggregate and across sectors.
Author | : Feng Chen |
Publisher | : |
Total Pages | : 43 |
Release | : 2009 |
Genre | : |
ISBN | : |
Download Implied Cost of Equity Capital in Earnings-Based Valuation Book in PDF, ePub and Kindle
Assuming the clean surplus relation, the Edwards-Bell-Ohlson residual income valuation (RIV) model expresses market value of equity as the sum of the book value of equity and the expected discounted future residual incomes. Without assuming the clean surplus relation, Ohlson and Juettner-Nauroth (2000) articulate the role of forward earnings per share in valuation. We compare the implied costs of equity capital from these two approaches to earnings-based valuation within seven developed countries. We hypothesize superior performance from the RIV model in countries where the clean surplus relation holds well. First, we provide preliminary international evidence on the frequency and magnitude of the clean surplus deviations. Consistent with our hypothesis, we document superior reliability of the implied cost of equity capital derived from the RIV model when clean surplus adequately describes the firms' financial reporting. That is, the implied cost of equity capital derived from Ohlson and Juettner-Nauroth (2000) is relatively more reliable in countries where the clean surplus deviations are common. Our analyses suggest that the proper choice of earnings-based valuation model may depend on analysts' interpretation of their financial reporting environment.
Author | : |
Publisher | : |
Total Pages | : |
Release | : 2011 |
Genre | : |
ISBN | : |
Download Extended Dividend, Cash Flow and Residual Income Valuation Models Book in PDF, ePub and Kindle
Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital. -- Dirty Surplus ; Terminal Value ; Steady-State ; Valuation Error
Author | : Aswath Damodaran |
Publisher | : Now Publishers Inc |
Total Pages | : 102 |
Release | : 2005 |
Genre | : Business & Economics |
ISBN | : 1601980140 |
Download Valuation Approaches and Metrics Book in PDF, ePub and Kindle
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.
Author | : James A. Ohlson |
Publisher | : |
Total Pages | : 24 |
Release | : 2000 |
Genre | : |
ISBN | : |
Download Residual Income Valuation Book in PDF, ePub and Kindle
This paper identifies problems related to RIV in an equity valuation context. Three problems are discussed. First, on a per share basis clean surplus will not generally hold if there are expected changes in shares outstanding; this aspect eliminates a necessary condition for the RIV-formula to be valid. Second, an all equity approach does not work if the firm plans to bring in quot;newquot; shareholders who derive a net benefit from their capital contributions. Third, GAAP violates clean surplus because some capital contributions are not accounted for in market value terms. As an alternative to RIV, the paper shows that it makes more economic/accounting sense to focus on expected eps, adjusted for dps, as a valuation attribute instead of current book value and expected residual earnings.
Author | : Stephen Penman |
Publisher | : Columbia University Press |
Total Pages | : 265 |
Release | : 2010-12-30 |
Genre | : Business & Economics |
ISBN | : 0231521855 |
Download Accounting for Value Book in PDF, ePub and Kindle
Accounting for Value teaches investors and analysts how to handle accounting in evaluating equity investments. The book's novel approach shows that valuation and accounting are much the same: valuation is actually a matter of accounting for value. Laying aside many of the tools of modern finance the cost-of-capital, the CAPM, and discounted cash flow analysis Stephen Penman returns to the common-sense principles that have long guided fundamental investing: price is what you pay but value is what you get; the risk in investing is the risk of paying too much; anchor on what you know rather than speculation; and beware of paying too much for speculative growth. Penman puts these ideas in touch with the quantification supplied by accounting, producing practical tools for the intelligent investor. Accounting for value provides protection from paying too much for a stock and clues the investor in to the likely return from buying growth. Strikingly, the analysis finesses the need to calculate a "cost-of-capital," which often frustrates the application of modern valuation techniques. Accounting for value recasts "value" versus "growth" investing and explains such curiosities as why earnings-to-price and book-to-price ratios predict stock returns. By the end of the book, Penman has the intelligent investor thinking like an intelligent accountant, better equipped to handle the bubbles and crashes of our time. For accounting regulators, Penman also prescribes a formula for intelligent accounting reform, engaging with such controversial issues as fair value accounting.
Author | : Richard P. Brief |
Publisher | : Routledge |
Total Pages | : 324 |
Release | : 2013-09-13 |
Genre | : Business & Economics |
ISBN | : 113560942X |
Download Clean Surplus Book in PDF, ePub and Kindle
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.
Author | : Edgar O. Edwards |
Publisher | : Univ of California Press |
Total Pages | : 344 |
Release | : 1973 |
Genre | : Business cycle |
ISBN | : |
Download The Theory and Measurement of Business Income Book in PDF, ePub and Kindle
Author | : Patricia M. Dechow |
Publisher | : Research Foundation of the Institute of Chartered Financial Analysts |
Total Pages | : 152 |
Release | : 2004-01-01 |
Genre | : Corporate profits |
ISBN | : 9780943205687 |
Download Earnings Quality Book in PDF, ePub and Kindle