An empirical assessment of the residual income valuation model

This paper provides an empirical assessment of the residual income valuation model proposed in Ohlson (Ohlson, J.A., 1995. Earnings, book values and dividends in security valuation. Contemporary Accounting Research 11, 661–687). We point out that existing empirical research relying on Ohlson's model is similar to past research relying explicitly on the dividend-discounting model. We establish that the key original empirical implications of Ohlson's model stem from the information dynamics that link current information to future residual income. Our empirical results generally support Ohlson's information dynamics. However, we find that our empirical implementation of Ohlson's model provides only minor improvements over existing attempts to implement the dividend-discounting model by capitalizing short-term earnings' forecasts in perpetuity.     

A fuzzy-based approach to residual income equity valuation

The decision of whether to buy, hold or sell equities depends on whether the current price reflects the stock’s intrinsic or fundamental value. The residual income valuation model expresses this fundamental value as a function of current book value of equity plus the sum of discounted expected residual income. Although past and present income and book value information is readily available to investors, values taken by essential parameters in this model are unknown ex ante, particularly the cost of equity or discount rate and future residual income. Any point estimate of equities’ fundamental value according to the model may therefore conceal considerable variation around the estimate, even in the presence of minor perturbations in the model’s inputs. In this paper, we introduce a fuzzy-based approach which reflects the imprecision inherent in certain parameters in equity valuation. We extend the limited prior fuzzy-based literature on investment analysis by introducing the concept of fuzzy fundamental equity value, initially on an illustrative example. To further demonstrate this fuzzy representation, illustrative financial statement data for individual UK companies are considered, with fuzzy fundamental equity values evaluated over progressive forecast horizons. Our series of illustrative applications (which encompasses the standard crisp approach) make the inherent uncertainty involved in estimating equity value immediately apparent.     

Comments on `An empirical assessment of the residual income valuation model'

The comment reviews major features of the research design of the DMS study. Several opportunities for future research are discussed, including the exploration of the underlying information variables that influence analyst's forecasts.     

A note on accounting conservatism in residual income and abnormal earnings growth equity valuation

The impact of conservative accounting on residual income (RI) and abnormal earnings growth (AEG) valuation models is investigated in this note. Limiting the analyses to information dynamics constrained models (the core models in Ohlson, 1995; Ohlson & Juettner-Nauroth, 2005), we find that both models can handle accounting conservatism if the persistence factors of residual income or abnormal earnings growth fulfil certain conditions. In a comparison of permissible time-series specifications, the AEG model can potentially handle more conservatively biased earnings in the first forecast period than the RI model. However, this requires that the growth of the conservative bias in the second forecast period is not too large. In a 0-NPV competitive equilibrium with a constant steady state growth, both models work equally well. Further elaborations indicate that, in the presence of accounting conservatism a reasonable value of the persistence factor of residual income in the RI model should be in the interval between 1.0 and R (where R = 1 + discount rate), whereas the persistence factor of abnormal earnings growth in the AEG model should be close to 1.0. This implies that the persistence factor in the RI model appears to have been understated while the persistence factor in the AEG model appears to have been overstated in previous empirical research.     

Forecasting stock price with the residual income model

The main purpose of this paper is to demonstrate a method to forecast stock price using analyst earnings forecasts as essential signals of firm valuation. The demonstrated method is based on the residual income model (RIM), with adjustment for autocorrelation. Over the past decade, the RIM has been widely accepted as a theoretical framework for equity valuation based on fundamental information from financial reports. This paper shows how to implement the RIM for forecasting and how to address autocorrelation to improve forecast accuracy. Overall, this paper provides a method to forecast stock price that blends fundamental data with mechanical analyses of past time series.     

The interpretation of CBDC within an endogenous money framework

Central bank digital currency (CBDC) has increasingly received attention among policymakers and academics. From a theoretical perspective, the introduction of a CBDC arouses long-standing questions, foreseeing the possibility for the private (non-financial) sector to access the central bank reserves. The aim of this paper is to strengthen the understanding of the CBDC through the Endogenous Money Theory (EMT). The paper examines the balance sheets of the central bank, commercial banks, and the non-financial private system, tracking all the assets and liabilities of the macro-agents involved in the introduction of a CBDC. It explains the logical chain of relationships starting with the creation of bank loans from commercial banks, transformed into deposits, and ultimately converted into CBDC. Such a chain of relationships is also explained by amending the four quadrants model proposed by many post-Keynesian scholars.     

On the IASB comprehensive income project: an analysis of the case for dual income display

The IASB is presently involved in a project on reporting comprehensive income. Since the IASB accounting model mixes two income determination systems, namely, historical cost accounting and fair value accounting, an interesting question pertains to whether the display of comprehensive income should reflect the existence of these two paradigms. This article scrutinizes, from both the points of view of accounting theory and a valuation perspective, the typical arguments made by proponents of historical cost net income and comprehensive fair value income. It finds that claims for exclusive reliance on a single concept of income are untenable. The analysis provides arguments in defence of an income display that explicitly features both income concepts. Such a dual income display would correspond to a categorization of comprehensive income that is currently investigated in the IASB performance reporting project. However, given the importance of summarization in financial analysis, as is most extremely reflected in the focus on the earnings per share (EPS) number, the case for a dual income display should also be considered at the highest level of summarization of financial performance reporting. In other words, mandatory publication of two EPS numbers, one for net income, and one for comprehensive income, should be considered. Possible effects on perception and actual use of financial reports that should enter such a consideration are suggested as topics for experimental research.     

A pedagogical note on the relationship between valuation methods and lifetime income

This paper presents an algebraic analysis to help students understand that the choice of a valuation method may or may not produce a permanent difference in reported income, depending upon a number of factors. By analysing these factors and the relationships among them, accounting students can increase their understanding of alternative accounting techniques and, at the same time, obtain additional practice in developing crucial analytical skills.     

The usefulness of inaccurate models: Towards an understanding of the emergence of financial risk management

Is the growth of modern financial risk management a result of the accuracy and reliability of risk models? This paper argues that the remarkable success of today’s financial risk management methods should be attributed primarily to their communicative and organizational usefulness and less to the accuracy of the results they produced. This paper traces the intertwined historical paths of financial risk management and financial derivatives markets. Spanning from the late 1960s to the early 1990s, the paper analyses the social, political and organizational factors that underpinned the exponential success of one of today’s leading risk management methodologies, the applications based on the Black–Scholes–Merton options pricing model. Using primary documents and interviews, the paper shows how financial risk management became part of central market practices and gained reputation among the different organisational market participants (trading firms, the options clearinghouse and the securities regulator). Ultimately, the events in the aftermath of the market crash of October 1987 showed that the practical usefulness of financial risk management methods overshadowed the fact that when financial risk management was critically needed the risk model was inaccurate.     

Axiomatization of residual income and generation of financial securities

This paper presents an axiomatization of residual income, also known as excess profit, and illustrates how it can univocally give rise to fixed-income or variable-income assets. In the first part it is shown that, depending on the relations between excess profit and the investor's excess wealth, a well-specified theory of residual income is generated: one is the standard theory, which historically traces back to Hamilton and Marshall and is a deep-rooted notion in economic theory, finance, and accounting. Another is the systemic value added or lost-capital paradigm: first introduced by Magni, the theory is enfolded in Keynes's notion of user cost and is naturally generated by an arbitrage-theory perspective. In the second part, the paper inverts the usual analysis: instead of computing residual incomes from a pattern of cash flows, residual incomes are fixed first to derive vectors of cash flows. It is shown that variable- or fixed-income assets may be constructed on the basis of either theory starting from pre-determined growth rates for residual income. In particular, zero-coupon bonds and coupon bonds traded in a capital market are shown to be deduced as equilibrium vectors of residual-income-based assets.     

Further insights on the puzzle of technical analysis profitability

This paper extends current results concerning technical analysis efficiency on the foreign exchange market and attempts to determine whether filtering the raw exchange rate series with some trading rule significantly changes its characteristics. Because of the non-normality of exchange rate series, bootstrap methods are used on the main daily exchange rates since 1974 to show technical analysis performance. The technical analysis strategy tested generates returns whose distribution is significantly different from the basic series. The robustness of the results is tested in and out-of-sample and an explanation of the technical analysis performance based on its filtering properties is suggested.     

A European view on the legitimacy of accounting procedures: Towards a deliberative-accountability framework for analysis

Accounting rules affect fundamental areas of social interaction encompassing groups that have diverse and conflicting interests regarding financial reporting. In the absence of a coherent social choice theory, concepts of legitimacy can be used to assess the acceptance of accounting standard-setting processes and their resulting norms. In this paper, we analyze the standard-setting process in Europe. Accounting rules in Europe are developed in a two-stage process involving both private standard-setting and public rule-making. From a structural perspective, the European Union (EU) is well positioned to develop legitimate accounting procedures. However, the original purpose and the ensuing legitimacy of its control mechanism are jeopardized when EU structures are used and sometimes abused for policy formation and the creation of EU-IFRS.     

收益法价值评估中贝塔系数（β）的理论及其应用

20世纪60年代,美国著名经济学家威廉.夏普(William F.Sharpe)教授等人在哈里·马克威茨(Harry M.Markowitz)投资组合理论的基础上,导出了风险资产定价的量化模型——资本资产定价模型(CAPM)。在这     

How do financial analysts implement the Sum-of-the-Parts (SOTP) valuation framework?

In this study, we investigate how financial analysts implement the Sum-of-the-Parts (SOTP) valuation framework. Although SOTP constitutes a popular valuation approach among sophisticated practitioners and investors, it is mostly ignored by researchers and academics. We adopt a structured content analysis of 265 equity research reports written by 33 investment brokerage houses for 140 UK-based firms. We find that analysts typically use EBITDA multiples to implement SOTP. Furthermore, financial analysts are more likely to consider SOTP the dominant or preferred valuation model in their report. We show that managers disclose a greater quantity of segmental information if their firms are considered difficult to analyze and value by investors and creditors, thereby decreasing the information asymmetry with their capital providers. In specific circumstances, we document that financial analysts identify more segments in their SOTP analysis compared to the reportable segments in the firms' annual reports based on IFRS 8. We argue that the financial analysts' choice to employ a greater number of segments in their SOTP models might be primarily driven by their effort to support their reports' optimistic target prices. Finally, although SOTP seems theoretically ideal to estimate the value of a multi-segment firm, we do not find empirical evidence to support the hypothesis that SOTP significantly outperforms a full-blown Discounted Cash Flow (DCF) model, when the latter is used separately to value the company as a whole.     

Using residual income to refine the relationship between earnings growth and stock returns

We use residual income (RI) to decompose earnings growth into growth in RI, growth in invested capital and other components and use this decomposition to explain stock returns. Our approach provides a significant increase in explanatory power vis-à-vis a regression of returns on levels and changes in earnings. While the market values growth in RI more than growth in invested capital, it still undervalues growth in RI and overvalues growth in invested capital. Earnings growth from growth in RI is more persistent, while earnings growth from growth in invested capital is more likely to reverse. Future returns are positively associated with growth in RI and negatively associated with growth in invested capital. A trading rule based on these findings generates significant hedge returns that persist after controlling for known risk factors. Hence, RI, a measure long recommended by accountants, allows investors to differentiate and evaluate different sources of earnings growth.     

Towards understanding attitudes of consumers who use internet banking services

Increasingly technology is being employed to replace or substantially diminish personal interaction in service provision. Research is beginning to shed light on the impact of this phenomenon on service provision and the behavioural response of customers. More, however, remains to be done by way of investigating and establishing the extent to which this means of service provision is effective in maintaining mutually beneficial customer-service provider relationships. This paper explains and discusses findings of a study undertaken for the purpose of illuminating reasons for using internet banking services, and establishing whether or not regular use of these services necessarily implies loyal patronage and that the customer has a sense of relationship with the service provider. Significantly, it was found that regular use does not necessarily imply willing or satisfied use, or that the customer has a sense of relationship with the service provider. Managerial implications of the findings are also considered.     

An Ohlson valuation framework for valuing corporate governance: The case of Taiwan

We examine the relation between a firm's market value, financial performance, and corporate governance as a cointegrated system in the Ohlson (1995) valuation framework. Using a comprehensive set of 29 governance measures in 4 categories for Taiwanese firms, we find that governance related to ownership structure and divergence between cash flow rights and control rights are important for a firm's market valuation. In particular, information about shareholdings of board directors and supervisors, shareholdings of controlling family, and voting rights are influential for firm value. Controlling for book value and residual incomes in the model, these governance measures track much of the remaining firm valuation that is unrelated to a firm's financial performance. Our findings provide some insight into the intrinsic value of corporate governance and the types of corporate governance mechanisms that are especially important for firms with similar ownership structure and controls.     

Towards an understanding of the phases of goodwill accounting in four Western capitalist countries: From stakeholder model to shareholder model

The objective of this paper is to illustrate that the change in shareholders’ attitude towards firms (from stakeholder model to shareholder model) influences the accounting treatments of goodwill. Our study is based on four countries (Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880. We explain that all these countries have gone through four identified phases of goodwill accounting, classified as (1) “static” (immediate or rapid expensing), (2) “weakened static” (write-off against equity), (3) “dynamic” (recognition with amortization over a long period) and (4) “actuarial” (recognition without amortization but with impairment if necessary). We contribute several new features to the existing literature on goodwill: our study (1) is international and comparative, (2) spans more than a century, (3) uses the stakeholder/shareholder models to explain the evolution in goodwill treatment in the four countries studied. More precisely, it relates a balance sheet theory, which distinguishes four phases in accounting treatment for goodwill, to the shift from a stakeholder model to a shareholder model, which leads to the preference for short-term rather than long-term profit, (4) contributes to the debate on whether accounting rules simply reflect or arguably help to produce the general trend towards the shareholder model, (5) demonstrates a “one-way” evolution of goodwill treatment in the four countries studied, towards the actuarial phase.     

Customers and investors: A framework for understanding the evolution of financial institutions

Financial institutions are financed by both investors and customers. Investors expect an appropriate risk-adjusted return for providing financing and risk bearing. Customers, in contrast, provide financing in exchange for specific services, and want the service fulfillment to be free of the intermediary's credit risk. We develop a framework that defines the roles of customers and investors in intermediaries, and use it to build an economic theory that has the following main findings. First, with positive net social surplus in the intermediary-customer relationship, the efficient (first best) contract completely insulates the customer from the intermediary's credit risk, thereby exposing the customer only to the risk inherent in the contract terms. Second, when intermediaries face financing frictions, the second-best contract may expose the customer to some intermediary credit risk, generating “customer contract fulfillment” costs. Third, the efficiency loss associated with these costs in the second best rationalizes government guarantees like deposit insurance even when there is no threat of bank runs. We further discuss the implications of this customer-investor nexus for numerous issues related to the design of contracts between financial intermediaries and their customers, the sharing of risks between them, ex ante efficient institutional design, regulatory practices, and the evolving boundaries between banks and financial markets.