A General Affine Earnings Valuation Model

Andrew Ang () and Jun Liu ()
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Andrew Ang: Columbia University and NBER
Jun Liu: UCLA

Review of Accounting Studies, 2001, vol. 6, issue 4, No 3, 397-425

Abstract: Abstract We introduce a methodology, with two applications, that incorporates stochastic interest rates, heteroskedasticity and risk aversion into the residual income model. In the first application, goodwill is an affine (constant plus linear term) function where the constant and linear coefficients are time-varying. Homoskedastic risk gives rise to a constant risk premium, while heteroskedastic risk gives rise to linear state-dependent risk premiums. In the second application, we present a class of models where a non-linear function for the price-to-book ratio can be derived. We show how interest rates, risk, profitability and growth affect the price-to-book ratio.

Keywords: stock valuation; earnings; residual income model; asset-pricing; affine model; linear information dynamics (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1023/A:1012497814339

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