Discussion of: “When Capital Follows Profitability: Non-linear Residual Income Dynamics”

Discussion of: “When Capital Follows Profitability: Non-linear Residual Income Dynamics” Review of Accounting Studies, 6, 267–274, 2001 C 2001 Kluwer Academic Publishers. Manufactured in The Netherlands. Discussion of: “When Capital Follows Profitability: Non-linear Residual Income Dynamics” PETER EASTON easton@cob.osu.edu The Ohio State University, Fisher College of Business, 2100 Neil Ave, Columbus, OH 43210 and The University of Melbourne My discussion of Biddle, Chen, and Zhang (2001) will focus on a core issue in that paper: the distinction between economic value added and accounting value added. This distinction is central to understanding and interpreting non-zero residual income. In general, this understanding helps in the implementation of the residual income valuation model (see, for example, Penman (2000)) and, in particular, it matters in the interpretation of observed non-zero residual income in empirical research (for example, Biddle et al. (2001)). Since Biddle et al. (2001) do not distinguish between the two components of residual income in their empirical analyses, it is not possible to determine whether their observed relations reflect the effects of accounting rules or positive NPV opportunities. I show how the two components of residual income may be formally defined within the Feltham and Ohlson (1996) model. This model may be used as a foundation for empir- ical analyses of http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of: “When Capital Follows Profitability: Non-linear Residual Income Dynamics”

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Publisher
Springer Journals
Copyright
Copyright © 2001 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1011679325783
Publisher site
See Article on Publisher Site

Abstract

Review of Accounting Studies, 6, 267–274, 2001 C 2001 Kluwer Academic Publishers. Manufactured in The Netherlands. Discussion of: “When Capital Follows Profitability: Non-linear Residual Income Dynamics” PETER EASTON easton@cob.osu.edu The Ohio State University, Fisher College of Business, 2100 Neil Ave, Columbus, OH 43210 and The University of Melbourne My discussion of Biddle, Chen, and Zhang (2001) will focus on a core issue in that paper: the distinction between economic value added and accounting value added. This distinction is central to understanding and interpreting non-zero residual income. In general, this understanding helps in the implementation of the residual income valuation model (see, for example, Penman (2000)) and, in particular, it matters in the interpretation of observed non-zero residual income in empirical research (for example, Biddle et al. (2001)). Since Biddle et al. (2001) do not distinguish between the two components of residual income in their empirical analyses, it is not possible to determine whether their observed relations reflect the effects of accounting rules or positive NPV opportunities. I show how the two components of residual income may be formally defined within the Feltham and Ohlson (1996) model. This model may be used as a foundation for empir- ical analyses of

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 3, 2004

References

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