Accounting-Based Valuation with Changing Interest Rates

Accounting-Based Valuation with Changing Interest Rates This paper generalizes Ohlson’s [Contemporary Accounting Research Vol. 11 No. 2. 661–687 (1995)] equity valuation framework to allow for stochastic interest rates. Much of this analysis initially deals with the specialized setting in which earnings suffice for cum-dividend value. In such a case, the beginning-of-period (lagged) rate determines the capitalization factor, not the current rate. The underlying earnings dynamic modifies the traditional random walk model via an additional term, namely current earnings multiplied by the percentage change in interest rates. The general model retains these basic aspects of the earnings-sufficiency setting. Empirical implications bear on the returns-to-earnings regression: The earnings-response coefficient decreases as the beginning-of-period rate increases. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Accounting-Based Valuation with Changing Interest Rates

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-004-7791-9
Publisher site
See Article on Publisher Site

Abstract

This paper generalizes Ohlson’s [Contemporary Accounting Research Vol. 11 No. 2. 661–687 (1995)] equity valuation framework to allow for stochastic interest rates. Much of this analysis initially deals with the specialized setting in which earnings suffice for cum-dividend value. In such a case, the beginning-of-period (lagged) rate determines the capitalization factor, not the current rate. The underlying earnings dynamic modifies the traditional random walk model via an additional term, namely current earnings multiplied by the percentage change in interest rates. The general model retains these basic aspects of the earnings-sufficiency setting. Empirical implications bear on the returns-to-earnings regression: The earnings-response coefficient decreases as the beginning-of-period rate increases.

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 4, 2004

References

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