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Earnings multifactor process, residual income valuation, and long-run risk [r-libre/1859]

Bergeron, Claude; Gueyie, Jean-Pierre, & Sedzro, Komlan (2019). Earnings multifactor process, residual income valuation, and long-run risk. Journal of Theoretical Accounting Research, 15 (1), 23-43.

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Content : Accepted Version
Item Type: Journal Articles
Refereed: Yes
Status: Published
Abstract: In this paper, we extend the residual income valuation model by incorporating the long-run sensitivity of earnings to various economic factors. Our valuation procedure integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in finance and accounting). Our extension model begins with an earnings multifactor process, uses an intertemporal equilibrium version of the residual income valuation method, and sums over many periods. In this manner, we demonstrate that the abnormal earnings growth rate of a firm is linearly and positively related to N sensitivity coefficients, given by the long-run sensitivity between abnormal earnings and economic factors. We then reveal that the corresponding equity value of the firm is a function of the current book value, abnormal earnings, and N long-run risk parameters. In the context of the residual income valuation approach, these findings suggest that earnings sensitivity to several factors represents an additional technique to estimate risk (in the long run).
Official URL: http://jtar.org/id4.html
Depositor: Bergeron, Claude
Owner / Manager: Claude Bergeron
Deposited: 20 Dec 2019 19:16
Last Modified: 20 Dec 2019 19:16

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