When Capital Follows Profitability: Non-linear Residual Income Dynamics |
| |
Authors: | Biddle Gary C Chen Peter Zhang Guochang |
| |
Institution: | (1) Department of Accounting, Hong Kong University of Science & Technology, Clear Water Bay, Kowloon, Hong Kong |
| |
Abstract: | Economic reasoning suggests that capital follows profitability. This study introduces into residual income valuation capital follows profitability investment dynamics whereby capital investments are guided by the profitability of underlying investment opportunities. These investment dynamics predict convex versus linear relations between future and current residual income, with slope and convexity dependent on investment opportunity. We test these predictions against the linear information dynamics (LID) proposed by Ohlson (1995) and Feltham and Ohlson (1996), with supportive results. These findings point the way to further development of links between firm value and the economics of value creation. |
| |
Keywords: | residual income valuation linear information dynamics investment dynamics non-linear residual income dynamics |
本文献已被 SpringerLink 等数据库收录! |