On the relevance of earnings components in valuation and forecasting

Pengguo Wang ()

Review of Quantitative Finance and Accounting, 2014, vol. 42, issue 3, 399-413

Abstract: This paper articulates the links between relevance of an earnings component in forecasting (abnormal) earnings and its relevance in valuation in a nonlinear framework. The analysis shows that forecasting relevance does not imply valuation relevance even though valuation irrelevance is implied by forecasting irrelevance. Firstly, I consider an accounting information system where earnings components “add up” to a fully informative earnings number. Secondly, I analyze two accounting systems where a “core” earnings component is the relevant earnings construct for valuation and the second earnings component is irrelevant but may be predictable and relevant in forecasting other accounting items. I find that dividend displacement effect on earnings and the dynamics of individual earnings components are critical in this analysis. Copyright Springer Science+Business Media New York 2014

Keywords: Valuation; Forecasting; Earnings components; Residual income valuation model; G17; G32; M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-013-0347-y

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