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Earnings, Earnings Growth and Value
Earnings, Earnings Growth and Value presents a model of earnings and dividends leading up to the core principle that growth in earnings explains the price to forward-earnings ratio. This model is referred to as the OJ (Ohlson and Jeuttner-Nauroth) model. The OJ model takes into account two growth measures of earnings -- the near term and the long term -- to explain the price to forward-earnings ratio. Further, the model allows for a broad set of dividend policies. Earnings, Earnings Growth and Value starts from the basics and derives the valuation formula which shows how value depends on earnings and their growth. Some of the topics developed here are include dividend policy irrelevancy (DPI), how one extends the model to incorporate an underlying information dynamic, accounting rules and their influence on the model, and ways in which the model can be extended to reflect operating vs. financial activities. Earnings, Earnings Growth and Value should be required reading for researchers in accounting and finance with an interest in accounting theory, equity valuation and financial accounting.
Applying the Ohlson and Feltham-Ohlson Models for Equity Valuation
This paper is designed as a secondary research that summarizes major findings related to the equity valuation models of James Ohlson (1995) and Gerald Feltham amp; James Ohlson (1995) from the viewpoint of their application in real world circumstances and with only publicly available information at hand. The Ohlson model estimates the value if equity on the basis of its book value and the sum of all future abnormal earnings calculated from a clean-surplus income and a charge for the required return on the equity investment. The consequent Feltham-Ohlson model adjusts the valuation for the effects of conservative accounting practices on book values and earnings.The paper presents a case study...
Clean Surplus
First published in 1996. The relationship between the present discounted value of future cash flows and discounted excess earnings should be viewed as a mathematical property of a double-entry book[1]keeping system based on clean surplus. The purpose of this anthology is to facilitate future research by highlighting these historical developments and by showing how more recent theoretical and empirical research fits into the earlier history. The book is divided into four sections: historical overview; analytical properties of clean surplus; the theory of the clean surplus equation; and empirical implications.
Called to Serve
For many Americans, nuns and sisters are the face of the Catholic Church. Far more visible than priests, Catholic women religious teach at schools, found hospitals, offer food to the poor, and minister to those in need. Their work has shaped the American Catholic Church throughout its history. McGuinness provides the reader with an overview of the history of Catholic women religious in American life, from the colonial period to the present.
On the Analysis of Firms' Cash Flows
This paper revisits the whys and hows of cash flows analysis. In a context of equity valuation, three aspects are considered. First, we consider why there is demand for an analysis of cash flows that complements GAAP's income statement. The issues here pertain to the ambiguity inherent in accruals, primarily due to current and past non-recurring items, and how one assesses the quality of earnings. Second, we suggest how an analysis of cash flows should be done to assess the extent of biases in accruals. We propose a framework of Modified Cash Accounting (MCA) which satisfies a crucial property: It works just like a regular income statement except that it eschews all accruals. Because a MCA s...
Equity Valuation
We review and critically examine the standard approach to equity valuation using a constant risk-adjusted cost of capital, and we develop a new valuation approach discounting risk-adjusted fundamentals, such as expected free cash flows and residual operating income, using nominal zero-coupon interest rates. We show that standard estimates of the cost of capital, based on historical stock returns, are likely to be a significantly biased measure of the firm's cost of capital, but also that the bias is almost impossible to quantify empirically. The new approach recognizes that, in practice, interest rates, expected equity returns, and inflation rates are all stochastic. We explicitly characterize the risk-adjustments to the fundamentals in an equilibrium setting. We show how the term structure of risk-adjustments depends on both the time-series properties of the free cash flows and the accounting policy. Growth, persistence, and mean reversion of residual operating income created by competition in the product markets or by the accounting policy are key determinants of the term structure of risk-adjustments.
Financial Modeling of the Equity Market
An inside look at modern approaches to modeling equity portfolios Financial Modeling of the Equity Market is the most comprehensive, up-to-date guide to modeling equity portfolios. The book is intended for a wide range of quantitative analysts, practitioners, and students of finance. Without sacrificing mathematical rigor, it presents arguments in a concise and clear style with a wealth of real-world examples and practical simulations. This book presents all the major approaches to single-period return analysis, including modeling, estimation, and optimization issues. It covers both static and dynamic factor analysis, regime shifts, long-run modeling, and cointegration. Estimation issues, in...
