Using accounting information for consumption planning and equity valuation

Using accounting information for consumption planning and equity valuation This article develops a consumption-based valuation model that treats earnings and cash flow as complementary information sources. The model integrates three ideas that do not appear in traditional valuation models: (i) earnings provide information about future shocks to cash flow; (ii) earnings contain indiscernible transient accruals; and (iii) investors use cash flow and earnings to make allocation and consumption decisions and set price. Accordingly, the quality of earnings affects production and consumption as well as price. Among other implications, the model reveals that a valuation coefficient is not just a capitalization factor; it is the product of a capitalization factor and a structural factor reflecting earnings quality and accounting bias. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Using accounting information for consumption planning and equity valuation

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Publisher
Kluwer Academic Publishers-Plenum Publishers
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-007-9026-3
Publisher site
See Article on Publisher Site

Abstract

This article develops a consumption-based valuation model that treats earnings and cash flow as complementary information sources. The model integrates three ideas that do not appear in traditional valuation models: (i) earnings provide information about future shocks to cash flow; (ii) earnings contain indiscernible transient accruals; and (iii) investors use cash flow and earnings to make allocation and consumption decisions and set price. Accordingly, the quality of earnings affects production and consumption as well as price. Among other implications, the model reveals that a valuation coefficient is not just a capitalization factor; it is the product of a capitalization factor and a structural factor reflecting earnings quality and accounting bias.

Journal

Review of Accounting StudiesSpringer Journals

Published: Mar 8, 2007

References

  • Valuation and clean surplus accounting: Some implications of the Feltham and Ohlson model for the relative information content of earnings and cash flows
    Clubb, C.
  • Firm-specific information and efficient resource allocation
    Christensen, P.; Feltham, G.

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