Linear information dynamics, aggregation, dividends and ‘dirty surplus’ accounting

David Ashton, Terry Cooke, Mark Tippett and Pengguo Wang

Accounting and Business Research, 2004, vol. 34, issue 4, 277-299

Abstract: We generalise the Ashton et al. (2003) Aggregation Theorem by demonstrating how the market value of equity disaggregates into its recursion and real (adaptation) components when the linear information dynamics incorporate a dirty surplus adjustment and also, when dividends are paid. Our analysis shows that ignoring the dirty surplus adjustment will, in general, induce biases into the functional expressions for the recursion and real (adaptation) values of equity. Furthermore, we show that whilst the recursion value of equity is independent of dividend policy, the real (adaptation) value of equity is affected by the dividend policy invoked by the firm. Tabulated results show that the difference in equity value between a dividend and a non-dividend paying firm is most pronounced at low levels of the recursion value.

Date: 2004
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DOI: 10.1080/00014788.2004.9729973

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