Discussion of “Residual Income and Value-Creation: The Missing Link”

Discussion of “Residual Income and Value-Creation: The Missing Link” Review of Accounting Studies, 7, 247–251, 2002 C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. Discussion of “Residual Income and Value-Creation: The Missing Link” JAMES A. OHLSON NYU/Stern School of Business I. Introduction O’Hanlon and Peasnell’s paper [OP, henceforth] on residual income and value creation makes a significant contribution to the literature. A backward-looking analysis of residual income is not only of mathematical interest, as it extends the usual forward-looking residual income valuation relationship (RIVR, to use OPs acronym), but also critical to the concept inherent in residual income and its applications. As a consequence, my major complaint about the paper pertains to a phrase in the title, “The Missing Link.” My comments will argue that phrase understates the importance of the OP analysis: The retrospective residual income formula (RIBR/EVC) takes on a more central role as compared to the usual prospective formula (RIVR). Two closely related arguments will support this claim; both depend on the simple observation that regardless of the perspective—backward or forward-looking—all of the formulae center around book value and the growth of book value. First, because book value represents an “investment” or stock concept, residual income meshes naturally with performance evaluation. But performance evaluation http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of “Residual Income and Value-Creation: The Missing Link”

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Kluwer Academic Publishers
Copyright © 2002 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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