Accounting Information and Firm Valuation

Cathy Zishang Liu, Kai-Cheung Kenneth Chu and C. S. Agnes Cheng

Chapter 82 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 2601-2641 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Our chapter aims to elucidate the theoretical relation and empirical observation between accounting information and contemporaneous firm value (measured as a firm’s stock price and/or stock return). Grounded on the intricate links of future expected cash flow and current stock price, future expected cash flow and future earnings, and future earnings and realized earnings, our work provides constitutional understanding of the residual income valuation model (Ohlson, 1995) and the abnormal earnings growth model (Ohlson and Juettner-Nauroth, 2003). The dynamics of the three intricate links and its implications for the valuation models has untangled a long-time myth in the literature of value relevance of financial reporting. Our chapter also presents the mediation effect of market efficiency on the empirical observation between accounting information and contemporaneous firm value.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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