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Earnings components, accounting bias and equity valuation
journal contribution
posted on 2023-06-07, 23:13 authored by Peter F Pope, Pengguo WangIn this paper we address three issues in accounting-based equity valuation: (i) How are valuation parameters related to earnings persistence and accounting conservatism when earnings components aggregate, or "add up", in valuation? (ii) What does aggregation of earnings components in valuation imply for abnormal earnings dynamics? and (iii) When is an earnings component "irrelevant" and "core" earnings the relevant construct for valuation? Assuming linear valuation, no-arbitrage, dividend irrelevance and clean surplus accounting, we show that when earnings components aggregate, valuation expressions and abnormal earnings dynamics are generalizations of the Ohlson (1995) model, incorporating simple adjustments for accounting conservatism. When "core" earnings are the relevant earnings construct, valuation expressions closely resemble the aggregation case, but core (abnormal) earnings replaces clean surplus (abnormal) earnings. We demonstrate that an earnings component can be irrelevant in valuation even when it is predictable
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Publication status
- Published
Journal
Review of Accounting StudiesISSN
1380-6653Publisher
SpringerExternal DOI
Issue
4Volume
10Page range
387-407Department affiliated with
- Business and Management Publications
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- No
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- No
Legacy Posted Date
2012-02-06Usage metrics
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