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Annual Survey of Economic Theory: The Theory of Depreciation
... The term "residual income" was apparently coined by the General Electric Company, and adopted first in the literature by Solomons (1965, p. 63), although the same concept, differently labeled, was studied even earlier (e.g. Preinreich 1936Preinreich , 1938Edwards and Bell 1961;Bodenhorn 1964). The contributions of Peasnell (1981Peasnell ( , 1982a and Ohlson (1989Ohlson ( , 1995 We use the symbol RI t to denote the residual income. ...
... See also Goetzmann and Garstka 1999). In later years, Preinreich (1936Preinreich ( , 1937Preinreich ( , 1938 made the link between residual incomes and NPV more explicit: ...
... A formal treatment in a finite-time setting was later carried out by Edwards and Bell (1961). In Appendix B of their book, the authors defined the excess realizable profit as C t + F t − (1 + r )C t−1 , where the capital C t is valued on the basis of Abnormal earnings (Ohlson 1989(Ohlson , 1995Feltham and Ohlson 1995;Francis, Olsson and Oswald 2000;Yee 2005; Revsine, Collins and Johnson 2005) Abnormal accounting earnings (Bao and Bao 1998) Abnormal economic earnings (Bao and Bao 1998) Abnormal operating earnings (Feltham and Ohlson 1995) Abnormal gain (Grant 1998) Abnormal profit (Bromwich and Walker 1998) Accounting residual income (Keef and Roush 2001a) Adjusted income (Peasnell 1981(Peasnell , 1982a, b) Adjusted profit (Carsberg 1966) Economic income (Grant 1998) Economic profit (Archer and D'Ambrosio 1972;Boadway and Bruce, 1984;Rao, 1992;Ehrbar 1998;Grant 1998;Kimball 1998;Martin and Petty, 2000;Fabozzi and Grant 2000;Arnold 2000Arnold , 2005Arnold , 2007Shrieves and Wachowicz 2001;Weaver and Weston 2003;Magni 2008b) Economic Rent (Cnossen 1998;Ehrbar 1998) Economic Value Added (Stewart 1991;O'Byrne 1996;Rogerson, 1997;Peasnell 1998, 2002;Ehrbar 1998;Hartman 2000;Magni 2000a,b,c;2001a,b;; Ghiselli Ricci and Magni 2006; Stoughton and Zechner 2007) Excess current income (Edwards 1980) Excess earnings (Preinreich 1936; Pratt, Reilly and Schweihs 1996) Excess economic income (Pratt, Reilly and Schweihs 1996) Excess income (Peasnell 1982a) Excess profit (Preinreich 1937(Preinreich , 1938Edwards and Bell 1961;Magni, 2001bMagni, , 2004Magni, , 2006) Excess realizable profit (Edwards and Bell 1961) Excess return (Rendleman 1978;Damodaran 2006a, b) Financial margin (Peccati 1987(Peccati , 1989(Peccati , 1991 Marginal return (Lohmann 1988) Period contribution (Peccati 1989) Period margin (Gallo and Peccati 1993;Pressacco and Stucchi 1997) Profit (Scitovszky 1943, Anthony 1975Reynolds 1963) Pure earnings (Bodenhorn 1964;Boadway and Bruce 1984;Cnossen 1998) Pure profit (Machlap 1942;Bodenhorn 1964;Boadway and Bruce 1984;Cnossen 1998) Quasi-rent (Peasnell 1981) Residual earnings (Ohlson 2003;Pope and Wang 2003; Penman 2010) Residual (capital) return (Grant 1998) Residual income (Scitovszky 1943, Solomons 1965Amey 1969Amey , 1975Tomkins 1975a,b;Emmanuel and Otley 1976;Kay 1976;Mepham 1980;Peasnell 1981Peasnell , 1982aOhlson 1989Ohlson , 1995Grant 1996;Bromwich and Walker 1998;Ehrbar, 1998 ...
We present the well-known Internal Rate of Return, and show that it suffers from many pitfalls and bears no direct relationship to the business transactions underlying the project’s activities (and, therefore, no relationship to the capital actually employed). Therefore, we advise practitioners to dispense with. We present two related approaches, the Modified-Internal-Rate-of-Return approach and Teichroew-Robichek-Montalbano model, discussing pros and cons, and concluding that all these metrics have serious drawbacks which are overcome by the AIRR approach presented in Chapter 8.
... The models that we use to study the effects of methods chosen for the implementation of IFRS in a country on the relevance of the accounting information are based on the theoretical works of Ohlson (1995; and Feltham and Ohlson (1995). These authors managed to revive the approach of abnormal profits (residual income) initiated by Preinreich (1938). In the aforementioned approach, they start from a logic based on the distribution of wealth for measuring wealth creation from abnormal discounted profits. ...
... In the aforementioned approach, they start from a logic based on the distribution of wealth for measuring wealth creation from abnormal discounted profits. According to Lee (1999), measuring the value of a company through abnormal profits comes from the empirical works in financial economics of Preinreich (1938) -developed later in the research of Edwards andBell (1961) Peasnell (1982). In general, this model expresses the value of a company by the amount of capital invested and the wealth created. ...
During the last two decades, many countries have chosen to implement the IFRS for at least one category of firms. According to Zeef and Nobes (2010), the implementation of IFRS can be classified into four methods. Thus, countries as Israel and South Africa have adopted the method "implementation process", others as Canada, Australia and the European Union have opted for the method called "Standard by Standard" while that Switzerland applies the "optional" method; China has chosen the "Not Fully converged" method. The analysis of these methods of implementation of IFRS demonstrates that these latter differ in terms of degree of compliance with the IFRS as issued by the IASB. This difference of compliance with the IFRS led us to wonder if it affects the quality of accounting information through its qualitative characteristic the "relevance". To answer this question, we use an empirical model that we apply to a sample of listed companies from six countries opting for different methods of implementation of IFRS. The significant results found demonstrates that the compliance of methods of implementation of IFRS influences positively the relevance of accounting information and that this relevance is better for the listed companies of countries which have chosen a compliant method of implementation with the IFRS as issued by the IASB. These results complement the previous studies on the relevance of accounting information following the transition to IFRS and give
... The OVM is based on two well-known models: the dividend discount model (DDM) [2] and the residual income valuation model (RIM) [3]. It also adds the linear information model (LIM) [4], which links future abnormal earnings with current accounting variables. ...
... The OVM is based on the residual income valuation model (RIM) [3]. According to the RIM, the firm value at the end of period ( ) follows this expression: ...
In this paper, we test whether the short-run econometric conditions for the basic assumptions of the Ohlson valuation model hold, and then we relate these results with the fulfillment of the short-run econometric conditions for this model to be effective. Better future modeling motivated us to analyze to what extent the assumptions involved in this seminal model are not good enough approximations to solve the firm valuation problem, causing poor model performance. The model is based on the well-known dividend discount model and the residual income valuation model, and it adds a linear information model, which is a time series model by nature. Therefore, we adopt the time series approach. In the presence of non-stationary variables, we focus our research on US-listed firms for which more than forty years of data with the required cointegration properties to use error correction models are available. The results show that the clean surplus relation assumption has no impact on model performance, while the unbiased accounting property assumption has an important effect on it. The results also emphasize the uselessness of forcing valuation models to match the value displacement property of dividends.
... This model traces the value of the company in the accounting data by summing two components -accounting book value and the discounted value of future residual income. The latter part captures all the other information that can affect the stock market price of a firm, other than accounting data ( (Preinrich, 1938); (Edward & Bell, 1961); (Peasnell, 1982)). In addition, (Ohlson, 1995) depicts price as a linear combination of equity book value and earnings weighted by earning persistence. ...
... The RIV equation was first presented by (Preinrich, 1938). The point worth noting in RIV is the change of focus from wealth distribution (Dividends) (PVED) to wealth creation (residual income) that take into accounts various operational efficiencies including CSR activities. ...
On December 10, 2018, The JUST Capital Foundation, in partnership with Forbes, has released the 2018 ranking of the one hundred most socially "just" companies in the United States (Forbes; Just capital Foundation, 2018).This paper aims to discuss the value generation potential of the selected companies in this list by using (Ohlson, 1995) model. Our findings suggest that the in the context of USA, markets value social responsibility efficiently and the impact is visible in various sectors. These results may be of interest for investment analysts, academic researchers, Governments and regulatory bodies. In addition, we suggest that the results may indicate an area into which valuation professionals should invest time and thought as they assess the values of privately-held companies.
... Analysing the mathematical expressions [1.1], [1.3] and [1.5], one can found that Ohlson's framework is a direct descendant of the research done in the 1960s (e.g., Edwards and Bell, 1961;Modigliani and Miller, 1958;Miller and Modigliani 1961) and also Preinreich (1938). In fact, the valuation expression of accounting data writing succinctly as the sum of book value and the present value of future abnormal earnings is not new; it can be found in Preinreich (1938), and in Edwards and Bell (1961). ...
... Analysing the mathematical expressions [1.1], [1.3] and [1.5], one can found that Ohlson's framework is a direct descendant of the research done in the 1960s (e.g., Edwards and Bell, 1961;Modigliani and Miller, 1958;Miller and Modigliani 1961) and also Preinreich (1938). In fact, the valuation expression of accounting data writing succinctly as the sum of book value and the present value of future abnormal earnings is not new; it can be found in Preinreich (1938), and in Edwards and Bell (1961). Its revival constitutes a major contribution to modern financial accounting. ...
The quality of earnings is a summary metric in firm performance evaluation and a focal question to assess the quality of accounting information. A high-quality earnings figure will reflect a firm's current operating performance, being a good indicator of future operating performance; it also accurately annuitizes the intrinsic value of the firm. The multidimensional nature of the earnings quality (EQ) concept has given form to a multiplicity of constructs and measures. This chapter offers a systematic literature review on EQ and its implication on firm value. On the one hand, it discusses the different existent definitions of EQ and the multidimensional nature of the concept; on the other hand, it highlights a “new” EQ perspective taking into account the virtuosities of the residual income model. An empirical model is proposed that reinterprets rebuilding the linear information dynamics in relation to market value added and captures, in a composite measure, the three-dimensional facet of the EQ concept: persistence, predictability, and informativeness of earnings.
... The present study adapts the Ohlson's (1995) model which was developed according to the suggestions of Preinrich (1938), Edwards and Bell (1961) and Peasnell (1982). It expresses the stock price as a function of the earnings per share and the book value per share, as follows: Where: Pit is the stock price, EPSit the earnings per share, BVSit the book value per share, and eit is the part of the price which is not interpreted by the model (residuals). ...
The aim of this study was to investigate the effect of accounting information on stock market reaction of quoted pharmaceutical companies in Nigeria by determining whether there is a significant relationship between accounting information and stock market reaction using 2009 to 2014 secondary data collected from the Nigeria Stock Exchange office in Port Harcourt, Rivers State, Nigeria. An ex post facto research design was appropriately adopted to address the objective of the study. Because of the research design adopted, a multiple regression analysis was employed to test the hypothesis raised in the study. The independent variable, which is accounting information, is measured as earnings per share (EPS) and book value per share (BVS), while the dependent variable, which is stock market reaction, is measured as stock price. The results obtained suggest that there is no statistically significant relationship between accounting information and stock market reaction; drawing on this finding, we concluded that accounting information has no significant effect on stock market reaction. Based on this finding, we recommend that sound and specific guidelines on accounting information should be issued by the Financial Reporting Council of Nigeria (FRCN) and the Security and Exchange Commission (SEC) so as to increase the relevance of accounting information of quoted companies.
... Given an arbitrary degradation pattern {x t } t=T t=1 and depreciation schedule {d t } t=T t=1 , it is still true that the stream of extended full costs FC 1 t (k | k) will be equal to LC, on average. Specifically, it follows from the conservation property of residual income (Preinreich 1938 andLücke 1955) that: Some cost accounting textbooks (Friedl et al. 2022) account for interest charges corresponding to the initial capacity investment by adopting straight-line depreciation and imputing an interest charge equal to half of the initial investment in each period. This approach results in an unambiguous relationship between LC and the full cost measure: ...
Levelized cost is a life-cycle cost measure that aggregates investment expenditures and operating costs into a unit cost figure. So far, most applications of this concept have originated in relation to energy technologies. This paper describes the role of the levelized cost concept in cost accounting and synthesizes multiple research streams in connection with electricity, energy storage, hydrogen and carbon capture. Finally, we sketch multiple potential future applications of the levelized cost concept.
... We follow the definition by Brunnermeier and Schnabel (2016) that a bubble is the part of the asset price that exceeds the fundamental value. The commonly used approaches for the calculation of the stock fundamental value are the dividend discount model (DDM) proposed by Campbell and Shiller (1988), Gacus and Hinlo (2018), Leibowitz (2000), Nasseh and Strauss (2004), Olweny (2011) and Williams (1938); the discounted cash flow model (DCF) (Awasthi et al., 2015;Damodaran, 2002;Jennergren, 2008;Rappaport, 1986;Shrieves & Wachowicz Jr, 2001); and the residual income model (RIM) (Edwards & Bell, 1961;Feltham & Ohlson, 1995, 1996Ohlson, 1995;Preinreich, 1938). Ohlson (1995), Feltham and Ohlson (1995) and Feltham and Ohlson (1996) proposed the RIM based on the linear information dynamics process, which believes that value is related to contemporaneous and future earnings, book values and dividends, and the goodwill equals the present value of future expected abnormal earnings (later literature named it residual income), if abnormal earnings obey an autoregressive process, then goodwill equals the current abnormal earnings scaled by a (positive) constant. ...
This paper provides a bubble date-stamping mechanism using the agent-based computational finance method. The key steps of the bubble date-stamping mechanism are the construction of the simulated financial market, the computation of the characteristic indexes, and the thresholds of the Price Band in the simulated financial market. The present study adopts the mechanism to identify the bubbles of sample stocks in the Chinese stock market from April 2003 to December 2019. The findings show that the bubbles are primarily distributed in respectively. Furthermore, we analyse the bubble strength and the price fluctuation during the above three periods. In addition to the bubble date-stamping mechanism, the paper also studies the factors that drive the bubbles in the Chinese stock market from both macro and micro perspectives.
... 3 As Lee, Myers, and Swaminathan (1999) point out, the reference to "EBO" is due to Bernard (1994). Various forms of the model can be found in Preinreich (1938), Edwards and Bell (1961), and Ohlson (1995), among others. NI a tþ1 = ω 11 NI a t þ ω 12 NI 2,t þ γ 1 Á ν t þ ε 1,tþ1 , (7a) ...
We introduce a new approach to estimating long-term aggregate discount rates using the cross section of earnings and book values to explain current stock prices and extract expected market returns. The proposed discount rate measure is countercyclical. Shocks to it account for nearly half of historical market return variation; in contrast, shocks to other discount rate measures account for no more than 2%. It dominates other measures in explaining time-series variation in returns on duration-sorted portfolios and delivers out-of-sample predictability that exceeds that afforded by other expected return measures and predictive variables. It also performs well in international equity markets.
... The RIM is attributed to Ohlson (1983) although this idea of book-valuebased theory had existed for some time prior to Ohlson's publication. It is based on techniques introduced by Preinreich (1938) prior to the work of Edwards and Bell (1965), Ohlson (1990) and Feltham and Ohlson (1995). Ohlson (1990) synthesised a theory to promote empirical studies on RIM. ...
Purpose
The objective of this paper is to investigate the validity of stock valuation theories and their forecasting ability by conducting an empirical study. It employs four most commonly used theories which are then tested using 19-year banking-firm market data. The usefulness of these models demonstrates with promising results.
Design/methodology/approach
This paper conducts a multi-country study using the multi-model testing approach to evaluate validity of theories and forecast accuracy of banking firms. It employs four methodology models used in finance literature; (1) P/E multiples model, (2) accounting-information-based clean surplus model, (3) theoretical model based on Gordon and Shapiro (1956) method and (4) the Damodaran-Kottler Free Cash Flow or FCF theory based on discounting model.
Findings
The tests show that the four theories under tests have a significant fit with actual price formation. The explained variation ranges from 72 to 92%, so the explanatory power of the theories accounting for variations in bank prices over 19-year period is substantial. The models fit suggest that the P/E model has superior predictive power followed by the RIM, DDM and FCFE. These findings shed new lights on the relative performance of valuation models.
Research limitations/implications
The study is limited in terms of the sample period size for 1999–2019. The availability of essential financial data prior to 2000 is very limited, so one can understand interpretation of statistical results under certain assumptions.
Practical implications
The paper suggests that one-factor model is better than the two-factor model.
Originality/value
The work done in this paper is unpublished and original contribution to banking and finance literature and also not under consideration for publication in any other journal.
... Since the nineteenth century, court decisions in the United Kingdom and the United States (Leake, 1921;Preinreich, 1936) involving the attribution of value to companies upon litigation, had set the understanding that a going-concern business is worth what could be received selling its existing net assets plus a portion associated to the business expected future sales. As early as the twentieth century, Leake (1921) conditioned the future portion to what he called "super profits," a measure of excess, so that the future can effectively add something more to the value of the company. ...
This paper presents a new approach to understand the nature of goodwill and how it should be accounted for. RIV-Residual Income Valuation model is derived at the transaction level. We show that the firm's economic value is made up of two states of wealth. The first (second) is the present value of expected residual profits that arise from implemented (still to be implemented) management decisions. We name the first Physical Equity-PE, and the second Intangible Equity-IE. IE is the goodwill. PE increases as IE decreases, but it grows back with the renewal of the plans of the concern. We conclude that acquired goodwill: (i) is a latent state of wealth, not yet an asset. Accordingly, what it is currently treated as non-separable intangible assets aggregated in acquired goodwill are competitive advantages or the forces that make residual profits possible in individual transactions; its monetary effect would be incorporated in PE and IE if these figures were measured by their fair values; and (ii) should be amortized according to the speed and proportion in which IE converts to PE. Through a case study we tracked the aggregate acquired goodwill of a corporation. We control to ensure that the corporation PE changes only as a result of its operations. Imposing a reasonable rate of return, we have found that in just 4 years that goodwill was totally converted into physical equity. If confirmed with further studies, the ideas of this paper will deeply affect the theoretical and empirical literature of goodwill, and the accounting regulation on the topic as well.
... in addition to defining book value, Preinreich (1936) divides the returns generated into two parts: one of them is the annual interest on capital (the interest of capital expenditure), with the other being the excess return above the interest rate. The very first article including a reference to the clean surplus relationship was Preinreich's (1938) study, where the author claims that "capital value equals book value plus excess profit". in his article, he placed a significant emphasis on the value of the firm, earned either by discounting the dividend or the excess profit. According to Preinreich (1936), the firm's profit generating power is the primary source of capital value. ...
... 11 Although Daniel, Hirshleifer, and Sun (2018) attempt to motivate their FIN factor from long-term overreaction and the PEAD factor from shortterm underreaction, the conceptual linkage between specific psychological biases and anomalies in question seems tenuous. 12 Fama and French (2015) attempt to provide an economic foundation for their five-factor model based on the residual income valuation model (Preinreich, 1938;Miller and Modigliani, 1961;Ohlson, 1995). In the dividend discounting model, a firm's market equity is the present value of its dividends: ...
Many recently proposed, seemingly different factor models are closely related. In spanning tests, the q-factor model largely subsumes the Fama–French five- and six-factor models, and the q⁵ model subsumes the Stambaugh–Yuan four-factor model. Their “mispricing” factors are sensitive to the construction procedure, and once replicated via the traditional approach, are close to the q-factors, with correlations of 0.8 and 0.84. Finally, consistent with the investment CAPM, valuation theory predicts a positive relation between the expected investment and the expected return. © The Author(s) 2018. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved.
... The RIM framework, as firstly appeared in the work of Preinreich (1938) and later in Edwards and Bell (1961) and Peasnell (1981Peasnell ( , 1982, states that asset prices represent the present value of future dividends and satisfying the clean surplus relation, the stock price is a linear function of only the book value and expected abnormal earnings. Ohlson (1995) reelaborated the early RIM and developed a framework showing how the market value is a function of three accounting data, namely, earnings, book value and dividends in addition to his contribution to information dynamics as part of the Olson's model. ...
Purpose
This paper aims to investigate the relevance of two groups of valuations models as follows: the accounting models based on the residual income (RIM) and the standard market model, on equity price, return and volatility relevance.
Design/methodology/approach
The models are tested on companies traded on Palestine exchange from 2009 to 2018, using panel regression analysis. Two-price and two-return models derived from RIM to compare with the market model and four volatility models.
Findings
The standard RIM outperformed other models in equity price modeling. The dividend discount model (DDM) outperformed the rest of the models in terms of return estimation. However, the authors find that the market model can explain equity variance better than RIM and DDM models.
Practical implications
For investors, market beta does not necessarily capture all relevant factors of value and traditional financial statements are still important in providing relevant information and different models are used for different values perspectives (price, return and volatility).
Originality/value
Previous studies focus on comparing the price and return relevance of accounting-based models (RIM and cash flow models). Three aspects differentiate this paper and contribute to its originality, namely, the uniqueness of the context, incorporating the market model into the picture along with the accounting-based models and adding Volatility dimensions of relevance.
... The RIM framework, as firstly appeared in the work of Preinreich (1938) and later in Edwards and Bell (1961), and Peasnell (1981, 1982, states that asset prices represent the present value of future dividends, and satisfying the clean surplus relation, stock price is a linear function of only the book value and expected abnormal earnings. Ohlson (1995) re-elaborated the early RIM and developed a framework showing how the market value is a function of three accounting data: earnings, book value, and dividends in addition to his contribution to information dynamics as part of the Olson's model. ...
Purpose: This paper aims at investigating the relevance of two groups of valuations models: the accounting models based on the Residual Income (RIM) and the Standard Market Model, on equity price, return and volatility relevance. Design & methodology: The models are tested on companies traded on Palestine Exchange (PEX) from 2009 to 2018, using panel regression analysis. Two-price and two-return models derived from RIM to compare with the Market Model and four volatility models. Findings: The standard RIM outperformed other models in equity price modeling. Dividend Discount Model (DDM) outperformed the rest of the models in terms of return estimation. However, we find that the market model can explain equity variance better than RIM and DDM models. Implications: For investors, market beta does not necessarily capture all relevant factors of value, and traditional financial statements are still important in providing relevant information, and different models are used for different values perspectives (price, return, & volatility). Originality: Previous studies focus on comparing the price and return relevance of accounting-based models (RIM and cash flow models). Three aspects differentiate this paper and contribute to its originality: the uniqueness of the context, incorporating the market model into the picture along with the accounting-based models, and adding Volatility dimensions of relevance.
... The often significant expenditures for reinstatement and disposal, renaturation, or re-cultivation occur at the end or even after a project's operating phase. In Germany, for example, utility companies have been obliged to spend billions of euros on dismantling nuclear power plants (von Hirschhausen et al. 2015) and on re-cultivating browncoal mining sites (Oei et al. 2018). Similarly, investments in garbage-disposal sites or off-shore wind-power plants are linked to large expenditures for renaturation and re-cultivation. ...
The use of accounting information and related performance measures for (delegated) investment decision-making has been extensively analyzed in the context of investment projects with upfront investments. In many cases, however, a project may also require large payments at the end of its life. In accounting statements, companies anticipate such payments by setting up provisions during a project’s useful life. To date, very few studies have explored provision schemes with regard to the decision-facilitating and the decision-influencing roles of management accounting. In this paper, we analyze three different provision schemes of practical relevance. We benchmark the cost allocations that result from each such scheme against cost allocations resulting from two provision schemes that are derived from the analysis of investment projects with upfront investments. The first comparison concerns the decision-facilitating role and builds on the principles of investment-based cost accounting according to Küpper (1985, 2009). The second comparison concerns the decision-influencing role and is based on the theory of goal-congruent performance measures as developed by Rogerson (1997) and Reichelstein (1997). These comparisons demonstrate to which extent the cost allocations associated with the provision schemes that are commonly used in practice deviate from the benchmark solutions we present. We also examine the potential distortions that may arise when accounting performance measures based on the practically relevant provision schemes are used for investment decision-making.
... In seeking to address this limited conceptualization of accruals in the Framework, a starting point is provided by the residual income model (Preinreich 1938;Edwards and Bell 1961;Peasnell 1982;Ohlson 1995). This model is of course simply a formal restatement of the discounted cash flow model, and so does not in itself demonstrate that the mechanism of accrual accounting is useful. ...
To meet the objectives of financial reporting in the IASB's Conceptual Framework, the “balance‐sheet approach” embraced by the Framework is necessary but not sufficient. Critical, but largely overlooked, is the role of uncertainty, which we argue defines the role of accrual accounting as a distinctive source of information for investors when investment outcomes are uncertain. This role is in some sense paradoxical: on the one hand, uncertainty undermines both the balance sheet (because uncertain assets are unrecognized) and the income statement (because mismatching is unavoidable). However, these inevitable accounting effects can be exploited to provide information about uncertainty, though not by a balance‐sheet approach alone. Rather, balance sheet recognition and measurement criteria are established by consideration of the impact of uncertainty on matching and mismatching in the income statement. This combination of balance‐sheet and income‐statement approaches enhances the communication of information to investors under conditions of uncertainty, thereby giving greater clarity and purpose in satisfying the objective of the Framework to provide information about “the amount, timing, and uncertainty of future cash flows.”
... This follows from stock prices being modeled as claims to future dividend distributions [53]. Alternate approaches emphasize stock prices as claims to future free cash flows, [10] or future abnormal earnings [14,42,46]. This equity capital is however fickle as the prices employed in valuing assets and liabilities are subject to constant motion, especially for the liquid items on both sides of the balance sheet. ...
Economic enterprises are modeled to have the return distributions of pure jump limit laws. Specifically the four parameters of a bilateral gamma process synthesize the up and down moves in returns with differing mean and variance rates for the two motions. Prudential capital assessments value a distant terminal payout defined by the accumulated returns. The valuation incorporates risk charges based on measure distortions that generalize the concept of distorted expectations. Particular risk charges are calibrated to data on S&P 500 index options and their associated time series. On the other hand regulatory capital evaluates extreme loss levels possible over a short time interval. For equity market returns the two calculations yield comparable magnitudes displaying enterprises with both sufficient and insufficient capital. Enterprises invested in Treasury bonds have regulatory capital requirements that are well below their prudential capital levels for long positions. Short positions may have insufficient prudential capital values relative to their regulatory counterparts. The additional prudential and regulatory capital costs of leveraged positions are illustrated. Hedge funds reflect high levels of prudential capital associated with low levels of required regulatory capital reflecting the access of good drifts at low risk levels.
The economic role of an accounting regime is to increase welfare through its effects – in conjunction with complementary institutions – on firm and household behavior. I review three major streams of the archival literature (real effects; price effects, including value relevance; and costly contracting), in terms of what they can and cannot reveal as proxies for welfare effects. One conclusion is that the partial correlations and average effects that predominate in this literature have provided valuable insights into the role of accounting in the economy, but provide limited and misleading proxies for welfare effects. A major concern is that teachers, students and researchers – indeed, regulators and standard setters – raised on this literature could lose sight of, and underestimate, the fundamental contribution of accounting to aggregate welfare.
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Charles J. Hirsch was an accountant and controller for the Golden Nugget casino from 1950 to 1970. He contributed to a movement in the 1950s and 1960s to advance the use of statistical sampling and analysis in the accounting profession. This manuscript is based on analysis of Hirsch’s professional papers, held at the University of Nevada, Las Vegas, Libraries Special Collections and Archives. Hirsch used statistical sampling and analysis at Golden Nugget when statistical techniques had not yet been widely accepted or implemented by practicing accountants and auditors. Beginning in 1959, Hirsch made numerous conference presentations describing his work. In addition, Hirsch explicitly challenged the accounting profession to follow his lead and integrate statistical sampling and analysis into existing practice. In doing so, he joined an exclusive group of individuals, including Robert Trueblood, who were early advocates for using statistical techniques to improve the practice of accounting and auditing.
Equity investors value CEO social capital when pricing firm equity. When CEO social capital is high, the value relevance of the book value of equity declines, whereas the value relevance of earnings measures increases. Results are stronger for firms in high-tech industries where information asymmetries are higher. Social capital may be deconstructed into informational and reputational effects and we report that social capital is a meaningful determinant of value relevance in both scenarios. Results are robust to alternative variable definitions, controls and tests for endogeneity. The results strongly suggest that CEO social capital improves the information environment around firms, benefiting users of accounting metrics.
This study develops a model of measuring over-financialization. We use a novel approach for modeling over-financialization when the actual financialization degree is over the target level. We test this model using data from the capital market of China. The findings are: (1) theoretically, our model can accurately distinguish over-finanialization from financialization of listed companies; (2) empirically, we analyze the company characteristics that affect over-financialization. We find that a) state-owned enterprises tend to restrain from over-financialization; b) the size of enterprises has a significant negative correlation with over-financialization; c) there are significant differences in corporate over-financialization across different regions.
Policy makers offer fiscal incentives to encourage companies to invest in renewable technologies. This work considers generation companies that take advantage of fiscal incentives to minimize income tax. Thus, a novel mixed-integer linear optimization model that minimizes total tax payments of a company owning a portfolio of energy projects is designed. The model strategically manages depreciation, tax loss carryforward, and tax incentive use for minimizing discounted income tax. A set of revenue scenarios was employed to analyze model results. The proposed model yields tax savings between 8.2% and 19.2% of the company’s taxes. Tax savings are significantly larger for companies with a large generation portfolio; which represents a clear advantage over small generation companies. The proposed model can also be employed by policy makers to adjust future ITA policies by taking advantage of the anticipative knowledge of the optimal tax strategies implemented by generation companies.
This paper provides insights about the information content and predictive ability of the intrinsic value of the firm in an asset pricing context. The intrinsic value of a firm is of great importance for both the management and the investors of the company. We seek to assess whether the value-to-price (V/P) ratio, estimated with the residual income model (RIM) can explain the cross section of stocks returns. The study enhances the literature in the area of asset pricing by developing a new intrinsic value risk factor, which is a zero-investment portfolio that is neutral to the size, book-to-market equity ratio and the momentum effect. Furthermore, we incorporate in the RIM, for the first time, a time series model that does not rely on analysts’ forecasts for the estimation of the key parameters of the model. A unique dataset from Greece, Italy, Spain and Portugal is utilized, from 31/12/2000 to 30/6/2019, that has a number of idiosyncrasies that are not observable in other developed markets, contributing by this way to the necessary accumulation of non-US research. The results show that the new intrinsic value risk factor absorbs the information content of the HML factor and explains better the cross section of returns, mainly for small size and high book to market value companies.
We show that the standard notion of residual income (RI) does not fulfill additive coherence. This gives rise to ambiguities and inconsistencies. The pitfall resides in the capital charge, which blends a non-market value with a market rate. We solve the problem by using a capital charge based on economic return, obtained as the product of a market value and a market rate. The resultant economic RI enjoys additivity. The economic RI is naturally associated to the average Return on Investment (ratio of total income to total invested capital). Subtracting the respective cost of capital (ratio of total economic return to total invested capital) the marginal economic efficiency of the capital is correctly captured. Economic RI guarantees consistency among the various sets of incomes, book values, economic values, accounting rates, and costs of capital, under an investment perspective as well as a financing one, both at a period level and at an aggregate level, either assuming time-invariant or time-varying costs of capital. Therefore, the economic RI offers a coherent tool for the assessment of a project’s or firm’s economic efficiency.
We examine the relationship between the use of value-based key performance indicators in a firm’s management control system and the dynamics of working capital (WC). We hypothesize that firms with value-based management control systems (VBMCS) manage WC more cautiously, in particular regarding excessive WC. Theoretically, we link this to the argument that value-based performance measures explicitly account for the economic costs of WC by considering the opportunity cost of capital. We empirically confirm our hypothesis by analyzing an extensive hand-collected data set of listed non-financial German firms between 2002 and 2014. We document that firms with VBMCS operate at lower levels of WC and, while seemingly less willing to settle deficient WC, reduce excessive WC more quickly. The latter does not seem to produce overinvestment activities, suggesting that VBMCS are particularly valuable in firms operating in high WC environments. Consistent with this notion, we find that firms operating in high-WC industries benefit more from the adoption of a VBMCS when we examine the link between firm value and the adoption of a VBMCS. Our study adds to the understanding of the influence of performance measurement within a firm’s management control system on firm behavior.
Abstract
La depreciación contable se ha constituido en un concepto significativo en la discusión sobre la valuación de activos durante las últimas dos centurias. La intención principal en este documento es examinar los orígenes del pensamiento contable sobre la depreciación desde una perspectiva interdisciplinar. La investigación se desarrolla realizando una revisión analítica de las contribuciones de los autores elegidos, en relación con las disciplinas donde han sido formados, para rastrear las influencias respectivas sobre los académicos y profesionales de la contaduría en la construcción del concepto y teorías sobre depreciación. Adicionalmente, y a manera ilustrativa, se discute la literatura que ha estudiado la depreciación para organizaciones en el sector público, utilizando como recurso metodológico las genealogías foucaultianas.
In this paper, we examine investors' valuation of the domestic and foreign components of total earnings after controlling for information beyond current earnings. Our sample consists of U.S. multinationals during the 1985-2002 period. In a prior study, Bodnar and Weintrop (1997) find that investors place a higher weight on foreign earnings than on domestic earnings in valuing securities, and that this finding can be explained in part by the higher growth opportunities in foreign markets. While this explanation is intuitively appealing, other possible explanations include the varying importance of information other than current accounting earnings in pricing securities and the possible misspecification of their model. One potentially important source of other information is information contained in revisions of analysts' forecasts of future (abnormal) earnings and terminal values. Excluding this information from the regression specification potentially leads to a correlated omitted variables problem. In this paper, we use the Liu and Thomas (2000) proxy for “other information,” which is derived from analysts' revisions of near-term and long-term earnings forecasts and discount rate changes. Including the “other information” variable greatly improves the explanatory power of the returns—earnings regression. Consistent with our predictions, we find that the bias resulting from excluding other value-relevant information has a greater effect on foreign earnings than on domestic earnings. Foreign earnings are no longer incrementally value relevant when we control for “other information.”
Este trabajo investiga si la rentabilidad implícita contenida en el precio de las acciones (IRE) es un buen estimador de la rentabilidad realizada de las acciones en el largo plazo.
A partir de una regresión de Mínimos Cuadrados Ordinarios, donde la variable dependiente es la rentabilidad realizada y la variable independiente es el IRE, encontramos una relación estadísticamente significativa y un R2 de 81%, entre el IRE y la rentabilidad realizada de invertir en el índice S&P 500 en períodos de 10 años.
Los resultados de la investigación nos permiten concluir que el IRE tiene la capacidad de explicar la rentabilidad realizada en las acciones que conforman el índice S&P 500 en períodos de 10 años.
This paper studies whether the return implied by stock price (implied return on equity, IRE) is a good estimator of the realised long-term return of investing in a stock market.
From an ordinary least squares regression, in which the dependent variable is the realised return and the independent variable is the IRE, we find a statistically significant relationship and an R2 of 81% between the IRE and the realised return of investing in the S&P 500 index for periods of ten years.
The results of this research allow us to conclude that the IRE has the power to explain the long term realised return of investing in the stocks included in the S&P 500 index for periods of ten years.
Valuation ratios divide stock price by accounting metrics such as earnings, earnings growth, and book value. This study adapts the general valuation framework in Ohlson and Juettner‐Nauroth (2005) and Ohlson (2005) to present a unified approach for developing valuation ratios based on fundamentals, referred to as fundamental valuation ratios. One starts with a valuation model that is driven by an accounting metric a and its abnormal growth, then divides the valuation model by a to get a fundamental valuation ratio. For any valuation ratio, one can find a corresponding fundamental valuation ratio, as long as the valuation model is based on the same metric a as the valuation ratio denominator.
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Background
Health economics are amongst academic fields which can aid in ameliorating conditions so as to perform better decisions in regards to the economy such as determining cash prices. The prediction of ending cash is fundamental for internal and external users and can come quite handy in terms of health economics. The most important purpose of financial reporting is the presentation of information to predict ending cash. Ergo, the aim of the research is to predict ending cash value using feature selection and MLR method from 2010-2012.
Methods
A feature selection algorithm (Best-First, Greedy-Stepwise and Ranker) was employed in this research to nominate relevant data that affect ending cash.
Results
Based on the results of the deployed feature selection method, the following features were indicated as the most relevant in terms of determine ending cash: interest payments for loans, dividends received from short and long term deposits, total net flow of investment activities, net increase (decrease) in cash and beginning cash based on best-first (CFS-Subset-Evaluation) and Greedy-Stepwise (CFS-Subset-Evaluation). Net out flow, dividends, dividends paid, interest payments for loans and dividends received deposits for short and long term were the most important data as indicated by the Ranker (Info-Gain-Attribute-Evaluation, Gain-Ratio-Attribute-Evaluation and Symmetricer-Attribute-Evaluation). According to Ranker (Principal-Components and Relifef-FAttribute-Evaluation) the best data for determining ending cash include beginning cash, interest payments for loans, dividends, net increase (decrease) in cash and dividends received from short and long term deposits. The findings were also indicative of a positive and highly significant correlation between dividends received from short and long term deposits and beginning cash (1.00**), with a significance level of 0.01, whereas the observed correlation between interest payments for loans and ending cash (0.999**), at a significance level of 0.01 was negatively significant.
Conclusions
The present research attempted to reduce the volume of data required for predicting end cash by means of employing a feature selection so as to save both precious money and time.
Russian stakeholders of joint stock companies, which shares are not traded on a stock exchange, and limited liability companies need the effective instruments which enable them to detect the facts of financial statement fraud quickly because the financial statement remains the main source of information about the companies’ performance for them. Although Institute of Auditors is one of the most reliable tools which identify financial statement manipulations, the costs, connected with audit, are too high and, and as a result, stakeholders have to look for other instruments to distinguish fraudsters, which make an attempt to overestimate or underestimate net assets and financial results, from non-fraudsters. Mathematical model of the American researcher Messod Beneish can be considered as an example of such tools. The general purpose of this paper is to identify whether it is possible, basing on the Beneish model, to create a new one, which enables to distinguish fraudulent from non-fraudulent financial statements reporting in Russia, and determine the accuracy level of fraud status forecasts made by using this model. In our research we are going to concentrate on identification of companies, which overestimate net assets and financial results. Tо obtain the information on the financial ratios included in the model we use financial reports of Russian both non-traded joint stock companies and limited liability firms. The conclusion can also be drawn that it is possible to develop the fraud detection probit model and linear model (integrated M-Score index), which enabled stakeholders to identify fraud status correctly in 83 and 60% respectively. Developing the model we include extra parameters, connected with growth rate of other income to sales ratio and an accounting policy of the company. It was found that fraud risk increases if the company chooses accounting policy according to which administrative costs are charged to core product expenses
We implement the most common empirical specifications, with different approaches to control for scale problems, used in studies on the value relevance of accounting information. We study whether the results offered by these specifications are consistent with the residual income valuation model and with the Burgstahler and Dichev option‐style valuation framework. Undeflated and per‐share specifications offer results that are more in line with both benchmarks. Other deflated specifications and approaches deviate, to different extents, from the expectations of both frameworks. We interpret these deviations as signs of misspecification.
In many decision contexts, there is a need for benchmark equity valuations, based on simplified modeling and publicly available information. Prior research on U.S. data however shows that the accuracy of such valuation models can be low and sensitive to the choice of model specifications and value driver predictions. In this paper, we test the applicability and pricing accuracy of three fundamental valuation (dividend discount, residual income, and abnormal earnings growth) models, all based on forecasts of company dividends, earnings, and/or equity book values. Extending prior research, we apply these models to Scandinavian firms with accounting data from the period 2005–2014, explicitly testing two approaches for the prediction of the value drivers—exogenously forecasted numbers versus projected historical numbers. Given access to the forecasted value drivers, the dividend discount model comes out as the most accurate valuation model. In particular, this holds in a comparison between the most parsimonious model specifications. The residual income valuation model generates the best pricing accuracy given the prediction of value drivers based on historical financial numbers. Notably, we observe pricing errors that in general are lower than what has been reported in prior U.S.‐based research for the dividend discount and the residual income valuation models. The pricing accuracy of the abnormal earnings growth models is surprisingly weak in the Scandinavian setting. However, these models improve somewhat after a couple of complexity adjustments, in particular with value driver predictions based on the projected history setting.
Purpose
The traditional one-stage constant growth formula has two main underlying assumptions: a company will be able to maintain its competitive advantage for completed investments in perpetuity, and each year in the future, it will be able to generate new investment opportunities with the same competitive advantage, which will also remain in perpetuity. The purpose of this paper is to develop a model that limits the duration of the competitive advantage.
Design/methodology/approach
A new model is developed, and it is used to value a public company.
Findings
In this study, the author introduces an alternative formula considering the duration of the competitive advantage, imposing a restriction on the fact that extraordinary returns cannot be sustained forever, and also separates the part of the value explained by the current investments from the portion of value created by future investments.
Originality/value
The traditional one-stage constant growth model used to determine the continuing value of a company has limitations regarding the duration of the competitive advantage. The developed formula corrects the problem limiting the time extraordinary returns will remain over time.
Knowledge of the measure of cash flow and of the dynamics of its creation is indispensable for a thorough understanding of many business phenomena, especially those linked to the growth of a company. Of particular interest are the relations between depreciation and the production of cash flow. This paper will examine the financial effects of the depreciation produced by the expansion effect known as the Lohmann-Ruchti Effect, according to which the systematic re-investment of the cash flow from the annual asset depreciation generates a process of growth in the invested capital without the need to rely on outside funds, debt or equity.
Для промышленного предприятия предложен алгоритм интеграции системы планирования с использованием проектно-ориентированного тактического планирования на базе системы драйверов стоимости с показателем верхнего уровня «экономическая добавленная стоимость».
Russian stakeholders of joint stock companies, which shares are not traded on a stock exchange, and limited liability companies need the effective instruments which enable them to detect the facts of financial statement fraud quickly because the financial statement remains the main source of information about the companies’ performance for them. Although Institute of Auditors is one of the most reliable tools which identify financial statement manipulations, the costs, connected with audit, are too high and, and as a result, stakeholders have to look for other instruments to distinguish fraudsters, which make an attempt to overestimate or underestimate net assets and financial results, from non-fraudsters. Mathematical model of the American researcher Messod Beneish can be considered as an example of such tools. The general purpose of this paper is to identify whether it is possible, basing on the Beneish model, to create a new one, which enables to distinguish fraudulent from non-fraudulent financial statements reporting in Russia, and determine the accuracy level of fraud status forecasts made by using this model. In our research we are going to concentrate on identification of companies, which overestimate net assets and financial results. Tо obtain the information on the financial ratios included in the model we use financial reports of Russian both non-traded joint stock companies and limited liability firms. The conclusion can also be drawn that it is possible to develop the fraud detection probit model and linear model (integrated M-score index), which enabled stakeholders to identify fraud status correctly in 83% and 60 % respectively. Developing the model we include extra parameters, connected with growth rate of other income to sales ratio and an accounting policy of the company. It was found that fraud risk increases if the company chooses accounting policy according to which administrative costs are charged to core product expenses.
This article considers the meanings of “life” within Objectivist ethics. It distinguishes between life lived moment to moment (a flow concept) and life-as-a-whole (a stock concept). It examines life's finality as related to life being the ultimate value. It questions whether one “lives to consume” or “consumes to live” from a desert island perspective. It discusses what one's whole life entails within the context of decision making. It looks at decisions between competing values. Finally, it discusses the distinction between ethical and ethically neutral actions and suggests ways in which inquiries regarding these may be approached.
This research is conducted for evaluating the impact of accounting numbers on stock prices of listed firms on Vietnam Stock Exchange. Data were collected from 416 listed firms for the period from 2012 to 2016. By using models of OLS, FEM, REM and GLS for evaluating the relationship between earnings per share (EPS), book value of stock (BV) and stock prices, the results show that EPS, BV have positive relationships with stock prices with the level of 48.13% basing on the model of Ohlson (1995) and on the model of Ohlson adjusted to Aboody et al. (2002). Based on the findings, some implications for investors and stakeholders have been given in the context of Vietnam.
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