On the relevance of earnings components in valuation and forecasting

On the relevance of earnings components in valuation and forecasting This paper articulates the links between relevance of an earnings component in forecasting (abnormal) earnings and its relevance in valuation in a nonlinear framework. The analysis shows that forecasting relevance does not imply valuation relevance even though valuation irrelevance is implied by forecasting irrelevance. Firstly, I consider an accounting information system where earnings components “add up” to a fully informative earnings number. Secondly, I analyze two accounting systems where a “core” earnings component is the relevant earnings construct for valuation and the second earnings component is irrelevant but may be predictable and relevant in forecasting other accounting items. I find that dividend displacement effect on earnings and the dynamics of individual earnings components are critical in this analysis. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

On the relevance of earnings components in valuation and forecasting

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0347-y
Publisher site
See Article on Publisher Site

Abstract

This paper articulates the links between relevance of an earnings component in forecasting (abnormal) earnings and its relevance in valuation in a nonlinear framework. The analysis shows that forecasting relevance does not imply valuation relevance even though valuation irrelevance is implied by forecasting irrelevance. Firstly, I consider an accounting information system where earnings components “add up” to a fully informative earnings number. Secondly, I analyze two accounting systems where a “core” earnings component is the relevant earnings construct for valuation and the second earnings component is irrelevant but may be predictable and relevant in forecasting other accounting items. I find that dividend displacement effect on earnings and the dynamics of individual earnings components are critical in this analysis.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 16, 2013

References

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