Forward Versus Trailing Earnings in Equity Valuation

Forward Versus Trailing Earnings in Equity Valuation This article articulates how forward earnings are more accurate valuation attributes than trailing earnings. First, I show that, while linear accrual rules cannot achieve accurate trailing earnings-value relations in a setting with unobserved information, they can achieve accurate forward earnings-value relations. Second, I prove that, even when accrual rules are restricted so that forward earnings fails to be an exact valuation attribute, more-forward earnings are more accurate valuation attributes than less-forward earnings or trailing earnings. In conclusion, even under deficient accrual policies, more-forward earnings are more accurate valuation attributes—the more-forward, the more accurate. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Forward Versus Trailing Earnings in Equity Valuation

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Publisher
Springer Journals
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.
10.1023/B:RAST.0000028192.03130.df
Publisher site
See Article on Publisher Site

Abstract

This article articulates how forward earnings are more accurate valuation attributes than trailing earnings. First, I show that, while linear accrual rules cannot achieve accurate trailing earnings-value relations in a setting with unobserved information, they can achieve accurate forward earnings-value relations. Second, I prove that, even when accrual rules are restricted so that forward earnings fails to be an exact valuation attribute, more-forward earnings are more accurate valuation attributes than less-forward earnings or trailing earnings. In conclusion, even under deficient accrual policies, more-forward earnings are more accurate valuation attributes—the more-forward, the more accurate.

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 30, 2004

References

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