John O'Hanlon

The University of Arizona | UA · Department of Electrical and Computer Engineering

SYNOPSIS After the financial crisis of the late 2000s, concern about delayed credit-loss recognition under the incurred-loss method prompted the FASB and the IASB to develop expected-loss methods. We review the development of these methods, including through comment-letter analysis. Initially, the FASB recommended immediate full recognition of expe...

Banks, financial statement users, and accounting standard setters have long disagreed on the informativeness of banks’ statements of cash flows (SCFs) and there is a lack of relevant evidence in the literature. This paper examines the informativeness of the SCFs of U.S. commercial banks in two settings where SCFs are purported to be useful. The fir...

After the financial and banking crisis of the late 2000s, the FASB and the IASB aimed to develop methods of accounting for credit losses that would give more timely recognition of those losses. The IASB (in 2009) and the FASB (in 2010) each initially issued its own exposure draft proposing separate approaches to achieving this. They then attempted...

The financial and banking crisis of the late 2000s prompted claims that the incurred-loss method for the recognition of credit losses had caused undesirable delay in the recognition of credit-loss impairment. In the wake of the crisis, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) worked...

The financial and banking crisis of the late 2000s prompted claims that the incurred-loss method for the recognition of credit-losses had caused undesirable delay in the recognition of credit-loss impairment. In the wake of the crisis, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) worke...

This article outlines the history of residual income as a performance measure, and describes the economic value added (EVA®) variant of residual income proposed by the consulting firm Stern Stewart and Co. It also summarises literature that has proposed or used residual income or a related accounting-earnings-based measure for the purpose of busine...

Following the financial and banking crisis of the late 2000s, accounting regulators sought to replace the incurred-loss method of loan-loss provisioning by a more forward-looking expected-loss method. Difficulties arose, including with respect to the weight that expected-loss provisioning should place on objective evidence of loss relative to evide...

Following the work of Basu in 1997, the excess of the sensitivity of accounting earnings to negative share return over its sensitivity to positive share return (the Basu coefficient) has been interpreted as an indicator of conditional accounting conservatism. Although this interpretation is supported by substantial evidence that the Basu coefficien...

Following Basu (1997), the difference between the sensitivity of accounting earnings to negative equity return (proxy for bad news) and its sensitivity to positive equity return (proxy for good news) is interpreted as an indicator of conditional accounting conservatism. However, there is concern that the earnings-sensitivity difference (ESD) may be...

From 2005, IAS 39: Financial Instruments: Recognition and Measurement required UK banks to support loan-loss provisioning with objective evidence that losses had been incurred, and thereby eliminated general loan-loss provisioning. It has been argued that the IAS 39 incurred-loss method of loan-loss provisioning delayed the recognition of loan loss...

This study examines the value relevance of mandated disclosures by UK firms of the investor-firm share of liabilities of equity-accounted associate and joint venture investees. It does so for the six years immediately following the introduction of FRS 9: Associates and Joint Ventures, which forced a substantial increase in such disclosures by UK fi...

This paper seeks to advance the practical application of theoretically grounded accounting based equity valuation models which use the concept of earnings persistence. It does so by employing an empirically tractable development of the clean surplus residual income based valuation models that appear in the literature as the basis for an empirical i...

Purpose - To improve on previous linear information valuation models (LIMs) by adding conservative accounting methods to reduce bias. Design/methodology/approach - Assumes expected future residual income (RI) as a linear function of the RI in the previous period, and of other information (OI) not yet revealed in the accounts. Explains the downward...

The fundamental assumption of accounting-based valuation models is that in the long-run, the accounting component vanishes and dividends are recovered. Therefore, accounting policies do not matter. In the extensive literature on the subject, this assumption has not been questioned. The key proposition of this paper is that when these models are par...

It has been suggested thai dirty surplus accouniinti (violation ot the clean surplus relationship (CSR)) may resull in mismeasurenienl of pL-rlbrmance and valtie. and that cross-counlry variation in dirty surplus accounting may cause particular prohit.'nis lor international comparisons. LIsing articulated data ihat are largely handcollocied. we eva...

This paper extends the residual income-based valuation framework to encompass an articulation between (i) value created for a firm's shareholders beyond the cost of their invested capital (excess value created) during a multi-period interval and (ii) a matching cumulation of the firm's residual incomes. We show that, absent an initial difference be...

This study uses recent developments in the theoretical modelling of the links between unrecorded accounting goodwill, accounting profitability and the cost of equity, together with Capital Asset Pricing Model (CAPM) betas, to estimate the ex-ante equity risk premium in the UK. The results suggest that, over our sample period from 1968 to 1995, the...

Misgivings about dirty surplus accounting practices derive, in part, from two related concerns. Firstly, it has been argued that dirty surplus accounting might result in value-relevant items being reported within ‘dirty surplus flows’ rather than within earnings. Secondly, it has been suggested that the low transparency of dirty surplus flows might...

EVA is a variant of residual income marketed by Stern Stewart & Co., a New York consulting firm, with the purpose of promoting value-maximising behaviour in corporate managers. This paper reviews the EVA system in the light of this purpose. First, it outlines the rationale for the use of residual income in "value-based management", highlighting the...

This paper constructs a simple setting in which economic returns always lead accounting earnings. It then uses this setting to explore analytically the likely effect of 'returns leading earnings' on the properties of the market-to-book ratio, accounting profitability, the price-earnings ratio and profitability persistence. The analysis predicts tha...

The paper extends previous research on earnings persistence by (i) studying earnings persistence and market responses pertaining to earnings inclusive and exclusive of extraordinary items (EI), and (ii) establishing the dominating influence exerted by the existence of EI. Using data related to 75 Canadian firms listed on the Toronto Stock Exchange,...

Advocates of dirty surplus accounting practices argue that such practices produce more useful reported earnings numbers because value irrelevant flows are eliminated from reported earnings. Opponents of such practices suggest that dirty surplus accounting can result in the exclusion of value relevant flows from reported earnings. By observing the r...

This paper provides a rationale for the view that there is no inconsistency between the expectation that a corporation will earn normal economic returns and the expectation that the corporation will generate a persistently growing stream of positive net present value opportunities, persistent exponential growth in unrecorded goodwill and persistent...

Motivated by the fact that residual income based models of the link between the value of equity capital and the outputs of accrual accounting recently appearing in the literature have been based on particular assumed classes of residual income time series process, this paper presents a general residual income based expression for the value of equit...

Abstract This study proposes a previously unexplored approach to the valuation of equity using accounting numbers. The valuation is carried out in two steps. First, a valuation anchor is provided by book value of equity or capitalized earnings. Second, a multiple based on a value driver of comparable firms,where the value driver might differ from t...