When Capital Follows Profitability: Non-linear Residual Income Dynamics

When Capital Follows Profitability: Non-linear Residual Income Dynamics Economic reasoning suggests that capital follows profitability. This study introduces into residual income valuation “capital follows profitability” investment dynamics whereby capital investments are guided by the profitability of underlying investment opportunities. These investment dynamics predict convex versus linear relations between future and current residual income, with slope and convexity dependent on investment opportunity. We test these predictions against the linear information dynamics (LID) proposed by Ohlson (1995) and Feltham and Ohlson (1996), with supportive results. These findings point the way to further development of links between firm value and the economics of value creation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

When Capital Follows Profitability: Non-linear Residual Income Dynamics

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Kluwer Academic Publishers
Copyright © 2001 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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