Zhang 2000

I wish to thank Ray Ball (the editor), Trevor Harris, Amir Ziv, an anonymous referee,
and especially James Ohlson for helpful comments and suggestions. I also thank seminar
participants at Baruch College, UC Berkeley, UCLA, Carnegie Mellon University, University of
Chicago, Columbia University, Cornell University, Duke University, Ohio State University, and
Yale University.
* Tel.: (510)-642-4789; fax: (510)-642-4700.
E-mail address: xzhang@haas.berkeley.edu (X. Zhang).
Journal of Accounting and Economics 29 (2000) 125}149
Conservative accounting and equity
valuation
Xiao-Jun Zhang*
Haas School of Business, University of California at Berkeley, Berkeley, CA 94720-1900, USA
Received 8 March 1999; received in revised form 12 June 2000
Abstract
This paper examines how conservative accounting a!ects the relation between
accounting data and "rm value. The analysis shows that conservative accounting
can be characterized equivalently in terms of book value, earnings, or book rate of
return. Furthermore, capitalized earnings generally provide a less biased estimate
of equity value than book value does. In addition, "rm growth a!ects the way
earnings and book value are combined in valuation. A weighted average of book value
and capitalized earnings, with the weight on earnings being an increasing and convex
function of growth, yields an asymptotically unbiased estimate of equity value. When
growth is positive, the weight on book value is negative. 2000 Elsevier Science B.V.
All rights reserved.
JEL classixcation: M41; G12
Keywords: Capital markets; Conservative accounting; Equity valuation; Book rate of
return; Residual income
0165-4101/00/$- see front matter 2000 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 5 - 4 1 0 1 ( 0 0 ) 0 0 0 1 6 - 1
Because of accounting conservatism, intangibles such as unrealized bene"ts of R&D or future
growth opportunities are not recognized as assets on the balance sheet. Recognized assets may also
be assigned relatively low values based on rules such as lower of cost or market. In addition,
accountants follow guidelines such as &choosing a solution that is least likely to overstate assets and
income' when implementing accounting standards. For more discussions regarding the concept of
conservatism, see Statement of Financial Accounting Concepts No. 2.
` P/B ratio is de"ned as market value of common equity (per share) divided by book value of
common equity (per share). P/E ratio is de"ned as price (adjusted for net dividends) divided by
earnings. Capitalized earnings is de"ned as R/(R!1)x
R
!d
R
, where R denotes the discount factor,
x
R
denotes earnings, and d
R
denotes net dividends. P/Cap.E is de"ned as price divided by capitalized
earnings. Under unbiased accounting, P/B and P/Cap.E on average equal one.
` Asymptotic analysis avoids the e!ect of idiosyncratic shocks and focuses on the general or on
average results. For example, the accounting policy of expensing R&D is generally considered to be
conservative, given that R&D on average generates future bene"ts. However, in cases when
particular R&D activity does not provide any future bene"t, expensing the cost is actually unbiased.
Asymptotic analysis can avoid such problems by focusing on ex ante long-term expected relations.
1. Introduction
This paper seeks to understand the general impact of conservative accounting
on the relation between accounting data and "rm value. The convention of
conservatism in#uences the establishment and implementation of accounting
standards, causing the average price-to-book (P/B) ratio to exceed one. Ab-
sence of on average equivalence between book value and market value leads to
questions regarding how accounting data relate to "rm value.
This study addresses two issues. First, I examine how conservatism in#uences
not only the average price-to-book (P/B) ratio but also the average price-to-
earnings (P/E) ratio. In this context, I also compare deviations of the average P/B
ratio and the average price-to-capitalized earnings (P/Cap.E) ratio from their
benchmark of one.` Second, I analyze how linear combinations of book value and
capitalized earnings yield unbiased estimates of "rm value. The emphasis is on the
properties of the weight coe$cients when the two weights sum to one.
A"rm is modeled in a multi-period setting with the going concern assumption
maintained throughout. Like Feltham and Ohlson (1995), I examine the asymp-
totic relations among book value, earnings and "rm value to capture the general
impact of conservatism.` The study builds on basic accounting and economic
principles, including the clean surplus relation, the assumption that the present
value of expected future cash #ows determines market value, and a measure of
asymptotic growth. I measure "rm growth based on the changes in "rm value,
and examine the e!ects of long-term growth on the properties of accounting
data and their relation with "rm value.
The analysis provides a unifying framework regarding the in#uence of ac-
counting conservatism on earnings, book value and book rate of return. I
show that under rather general conditions the following characterizations of
126 X. Zhang / Journal of Accounting and Economics 29 (2000) 125}149
" The term &terminal value' is used to refer to either the value of equity or the value of goodwill at
the end of the forecast horizon. For detailed discussions, see Copeland et al. (1994), Penman (1998a),
and Ohlson and Zhang (1999).
conservative accounting are equivalent: (i) book value is on average less than
market value; (ii) earnings are on average less than (equal to) economic income
when long-term growth exceeds (equals) zero; and (iii) book rate of return is on
average greater than the discount rate. Feltham and Ohlson (1995) derive (ii)
and (iii) based on the assumption of linear information dynamics. This paper
generalizes their insights by showing that, under rather general conditions,
properties (ii) and (iii) hold as long as book value is on average less than market
value. In addition, these properties not only are implied by, but also imply,
conservative accounting.
Based on the analysis of how conservatism a!ects accounting data, I show
that the average P/Eratio equals (exceeds) the capitalization factor when growth
equals (exceeds) zero. By comparing the asymptotic deviations of P/B and
P/Cap.E from their benchmark of one, I further show that capitalized earnings
generally provide a less biased estimate of "rm value than book value does.
A key result demonstrates that, under conservative accounting, "rm growth
plays an important role in combining earnings and book value in valuation.
A weighted average of book value and capitalized earnings, with the weights
being independent of the extent of conservatism in accounting, yields an asymp-
totically unbiased estimate of "rm value. The weight on capitalized earnings is
an increasing and convex function of growth. When long-term growth is posit-
ive, the weight on capitalized earnings is greater than one and the weight on
book value is negative.
The above result provides a benchmark for research that relates earnings and
book value to "rm value under conservative accounting. In an empirical study,
Penman (1998b) examines how earnings and book value can be integrated in
equity valuation. He expresses market value as a weighted average of book value
and capitalized earnings, and analyzes the properties of the weight coe$cients.
He "nds that, in "ve out of the 12 sample groups, the median coe$cients on
book value are negative. These negative coe$cients on book value are viewed as
being di$cult to interpret (Burgstahler, 1998). My analysis demonstrates that it
is possible for negative coe$cients on book value to be attributed to conserva-
tism in accounting. This result also bears on market-based accounting research
that involves regressing market value on book value and earnings. Several
papers, including Amir and Lev (1996) and Francis and Schipper (1999), docu-
ment that in certain years the regression coe$cients on book value are negative.
My analysis helps interpret such results.
This study also relates to research on terminal value estimation, which arises
in equity valuation based on "nite forests." Frankel and Lee (1998), Penman and
X. Zhang / Journal of Accounting and Economics 29 (2000) 125}149 127
` This approach serves two purposes. First, it allows the paper to incorporate Miller and
Modigliani's (1961) basic concept regarding debt by assuming that the "rm's borrowing (and
lending) activities, whether incremental or on average, yield zero net present value. Second, it
emphasizes that conservatisma!ects mainly the measurement of operating activities. Since "nancing
activities involve assets for which there are relatively perfect markets, one can conceptualize
that book values and market values of "nancial assets approximately coincide. In contrast,
operating assets are typically not individually traded. Accounting conventions such as conserva-
tism generally lead to divergence between the book value and the market value of operating
assets.
Sougiannis (1998) and Lee et al. (1999) estimate terminal year's goodwill by
assuming that residual earnings beyond the forecast horizon follow a random
walk. This paper shows that conservative accounting can cause residual earn-
ings to be positive on average and to grow at a rate greater than zero. In light of
this result, assuming that residual earnings follow a random walk would under-
estimate terminal values.
The rest of the paper is organized as follows. Section 2 speci"es the basic
model. Section 3 examines how conservatism in#uences earnings, book value
and book rate of return. These properties of conservative accounting are then
used in Section 4 to demonstrate that capitalized earnings provide an asymp-
totically less biased estimate of "rm value than book value does. Section 4 also
analyzes the weighted average model and establishes a mapping between the
asymptotic weights and the growth rate. Financing activities are added to the
"rm's operating activities in Section 5. Section 6 discusses some empirical
implications. Section 7 concludes the paper with a brief discussion of contribu-
tions, limitations and extensions.
2. Assumptions and concepts
I model a "rm in a multi-period setting and assume it is a going concern.
Initially I also assume that the "rm is entirely equity-"nanced, with no borrow-
ing or lending activities. This simpli"cation enables the paper to focus on
the measurement of the "rm's operating activities. I relax this assumption in
Section 5.`
Given this all-equity setup, the "rm does not build up "nancial assets or
liabilities. Its operating cash #ows precisely o!set "nancial cash #ows to the
owner. I apply standard valuation concepts and assume that the present value of
expected cash #ows determines the current market value of the "rm:
<
R
,
E
R
[c
R>
]
R
#
E
R
[c
R>`
]
R`
#2 (1)
' Implicit in expression (1) is the assumption that the term structure of interest rates is #at. This
assumption can be relaxed by assuming that the relation holds asymptotically, and all conclusions
still hold. The analysis in this paper can also be extended to encompass risk aversion and
non-homogeneous beliefs. See Feltham and Ohlson (1999).
where R'1 speci"es the non-stochastic discount factor and c
R
denotes net cash
#ows during period t.'
On each date t (t"1,2,
2
) the "rm discloses accounting data pertaining to its
operating activities. These data are random prior to their disclosure, and the
probabilistic structure governing their stochastic behavior is exogenous. The
following notation is used to denote the accounting and market measures of "rm
activities:
oa
R
book value of the "rm's net operating assets at time t;
ox
R
accounting operating earnings during period t;
oe
R
economic operating income during period t, de"ned as <
R
#c
R
!<
R
.
Accounting is assumed to satisfy the clean surplus relation; i.e., changes in the
book value of net operating assets are reported as operating earnings or cash
#ows to/from the owner:
oa
R
"oa
R
#ox
R
!c
R
. (2)
Such a relation represents a fundamental characteristic of measurement: Cha-
nges in the &stock' reconcile with the net &#ow'.
Additional restrictions are also needed to carry out the analysis. Because the
paper focuses on how conservatism in#uences the asymptotic, or ex ante
long-term steady state, relations among earnings, book value and "rm value,
I impose the following regularity conditions to ensure that asymptotic ratios
such as book-to-market are well de"ned:
E
R
[O
]'0 for all *0
and
0)lim
O`
E
R
[O
!O
]
E
R
[O
]
"g(R!1, (3)
E
R
[
&
oa
R>O
]*0 for all *0 and lim
O`
E
R
[
&
oa
R>O
]
E
R
[O
]
(R. (4)
Regularity condition (3) requires the market value of the "rm to be positive
and the "rm's asymptotic growth rate to be non-negative. The asymptotic
growth rate (g), which is measured by the change in "rm value, is restricted to be
less than R!1 to ensure that the equity value calculated using Eq. (1) is
` Although I assume the existence of g, it can be derived from more basic assumptions such as
Markovian evolution of transactions/events and linear accounting rules (See, for example, Ohlson
and Zhang, 1998). This growth rate depends on the "rm's retention of capital as well as its
implementation of positive net present value projects.
` The growth rate is assumed to be less than R!1 to ensure convergence in the present value
calculation using Eq. (1). Strictly speaking, when g'R!1, the transversality condition used to
derive Eq. (1) would be violated and Eq. (1) would no longer hold.
"nite.`` Note that condition (3) allows for the possibility of bankruptcy, which
is incorporated in the expectation of future "rm values. I also assume that the
growth rate is non-negative to avoid negative (or zero) asymptotic market
values. It will become apparent that the analysis also applies to the case when
g is negative, i.e., when the "rm is assumed to be declining and eventually going
out of business.
Regularity condition (4) restricts accounting measurements. It requires that
the accounting not be so conservative that book values are on average negative.
Negative book values cause problems in interpreting ratios such as book rate of
return. Condition (4) also requires that the accounting constructs not be too
aggressive. Policies violating the second part of condition (4) have to be highly
aggressive in the sense that, regardless of the actual growth rate of the business,
the accounting policy keeps the book value growing at a higher rate and
eventually drives the ratio between the expected book value and the expected
market value to in"nity.
Assumptions speci"ed in this section form the foundation of the analysis. In
the following section, I provide a unifying framework regarding how conserva-
tism in#uences book value, earnings, and book rate of return. These properties
of conservatism will then be used in Section 4 to analyze the link between
accounting data and "rm value.
3. Impact of conservatism on accounting data
Following Felthamand Ohlson (1995), conservative and unbiased accounting
are de"ned in terms of how book value di!ers, on average, from market value.
De,nition. An accounting policy is conservative if
lim
O`
E
R
[
&
oa
R>O
]/E
R
[O
](1 regardless of the date t information;
An accounting policy is unbiased if
lim
O`
E
R
[
&
oa
R>O
]/E
R
[O
]"1 regardless of the date t information.
" See, for example, Davidson et al. (1982, pp. 581}588).
The above de"nition of conservative accounting focuses on the systematic
bias in book value. Such bias is introduced by the principle of conservatism
which a!ects the setting and implementation of accounting standards. Conser-
vative accounting standards include, for example, not recognizing the bene"ts of
R&D and rapid depreciation of "xed assets. In addition, accounting rules such
as lower of cost or market require early recognition of unrealized losses, causing
earnings to re#ect &bad news' more quickly than &good news'. This aspect of
conservative accounting is emphasized in Basu (1997).
The following observation regarding unbiased accounting follows immediate-
ly from its de"nition.
Observation 1. Given unbiased accounting, i.e.,
lim
O`
E
R
[
&
oa
R>O
]/E
R
[O
]"1, (5)
then
lim
O`
E
R
[
&
ox
R>O
]/E
R
[
&
oe
R>O
]"1; (6)
and
lim
O`
E
R
[
&
ox
R>O
]/E
R
[
&
oa
R>O
]"R!1. (7)
Eq. (5) compares the stock measure generated by accounting,
&
oa
R>O
, with the
market stock measure, O
. By de"nition, when accounting is unbiased,
book value on average equals market value. Eq. (6) compares the two #ow
measures. It shows that accounting earnings on average coincide with eco-
nomic income. Eq. (7) examines the relation between earnings and book
value and indicates that the ratio of the two on average equals the discount
rate R!1.
When accounting is conservative, two issues emerge. The "rst issue is how
these ratios change. Textbook examples illustrate that although book value is
less than market value under conservative accounting, earnings can be greater
than, equal to, or less than economic income depending on growth." Feltham
and Ohlson (1995) generalize these results to an uncertainty setting and also
relate earnings to book value by showing that book rate of return asymp-
totically exceeds the discount rate. Their proof, however, is based on the
assumption of linear information dynamics. The question remains whether
their results can be obtained using more basic accounting and economic
principles such as the clean surplus relation. The second issue is to what
extent any one of these characterizations of conservative accounting is also
necessary/su$cient for the others. The following proposition addresses these
two issues.
Proposition 1. Assume regularity conditions (3) and (4) hold. The following three
statements are equivalent:
lim
O`
E
R
[
&
oa
R>O
]/E
R
[O
](1; (8)
lim
O`
E
R
[
&
ox
R>O
]/E
R
[
&
oe
R>O
]
(1 when g'0,
"1 when g"0,
(9)
lim
O`
E
R
[
&
ox
R>O
]/E
R
[
&
oa
R>O
]'R!1. (10)
Note: all proofs are in the Appendix.
Eq. (8) states that when accounting is conservative, by de"nition, the P/B ratio
is asymptotically greater than one. Statement (9) indicates that growth plays
a prominent role in determining the relation between earnings and economic
income. When there is no growth, operating earnings asymptotically equal
economic income. This result incorporates the idea of what has been tradition-
ally referred to as the &canceling-error' argument, which can be formalized as
follows. Suppose that, because of accounting conservatism, the book value (of
net operating assets) equals oa
R
, which is less than the "rm value <
R
. The
di!erence,
R
,<
R
!oa
R
, represents an error in the accounting measure of "rm
value and is referred to as measurement error at time t. Given the amount of
measurement error at time t and t!1, we can calculate the earnings for period
t and compare it with the economic income:
ox
R
"c
R
#oa
R
!oa
R
"c
R
#(<
R
!
R
)!(<
R
!
R
)
"c
R
#<
R
!<
R
!(
R
!
R
)
"oe
R
!(
R
!
R
). (11)
Eq. (11) shows that the di!erence between earnings and economic income
depends on the change in measurement errors (
R
!
R
) during period t. If
R
"
R
, then earnings equal the economic income because the two measurement
errors (
R
and
R
) exactly cancel each other. This canceling-error argument
" Strictly speaking, the claim is inaccurate in the sense that lim(E
R
[
&
ox
R>O
/
&
oa
R>O
]) generally
does not equal to lim(E
R
[
&
oxR>O ]/E
R
[
&
oa
R>O
]). We can roughly check the di!erence by assuming
that
&
ox
R>O
and
&
oa
R>O
have independent log normal distributions, i.e., Log(
&
ox
R>O
)&N(
V
,`
V
) and
Log(
&
oa
R>O
)&N(
?
,`
?
). It is easy to show that Log(E
R
[
&
ox
R>O
/oa
R>O
])'E
R
[Log(
&
ox
R>O
/oa
R>O
)]
"
V
!
?
and Log(E
R
[
&
ox
R>O
]/E
R
[oa
R>O
])"
V
!
?
!(`
?
!`
V
)/2. Therefore, assuming
`
?
*`
V
, lim(E
R
[
&
ox
R>O
]/E
R
[
&
oa
R>O
])'R!1 implies lim(E
R
[
&
ox
R>O
/
&
oa
R>O
])'R!1.
suggests that when measurement error remains unchanged over time (due to
reasons such as consistent application of accounting standards and repeated
"rm operation), earnings will on average equal the true economic income
regardless of whether the accounting is unbiased or not.
Statement (9) also shows that when growth is positive, the above canceling-
error argument no longer holds. Even though to some extent
R
and
R
still
cancel in the earnings calculation, the reduction in current earnings (
R
) becomes
such a dominating factor that accounting earnings are on average less than
economic income. Implications of this partial canceling-error phenomenon are
explored in Section 4.
Because conservative accounting in general reduces book value, we can
conclude that book rate of return exceeds R!1 when there is no growth.
However, when growth is positive, the conclusion is not obvious. In a book rate
of return evaluation, conservatism decreases not only the denominator (begin-
ning book value) but also the numerator (earnings). Nonetheless, we would
expect that the numerator e!ect will be dominated by the denominator e!ect
because reduction in book value is the cumulative impact of prior conservative
practices. Statement (10) formally demonstrates that book rate of return exceeds
R!1 even when growth is positive."
Proposition 1 derives the general impact of conservatism on earnings, book
value and book rate of return. It shows that characterizations of conservative
accounting in terms of book value, earnings, and book rate of return are
equivalent in that any one of them implies the other two. Therefore, under
rather general conditions, (9) and (10) not only are properties of conservative
accounting, but also imply that the book value is on average less than
the market value. These characteristics of conservatism are used in the
following section to examine the relation between accounting data and
"rm value.
4. Conservative accounting and valuation
Before studying the asymptotic relations among earnings, book value and "rm
value under conservative accounting, I "rst establish a benchmark regarding
The relation between (E
R
[
&
oa
R>O
], E
R
[
&
ox
R>O
], E
R
[cJ
R>O
]) and E
R
[O
] is emphasized because
simple methods such as the earnings-multiple approach are often used by investors as bench-marks,
or starting points, to achieve precise valuations. Even in more complicated schemes, valuation using
&bottom line' numbers still plays an important role. As discussed in Copeland (1994), Penman
(1998a), and Ohlson and Zhang (1999), equity valuation based on "nite forecasts involves estimating
terminal value, which is often a critical part of the analysis. By focusing on the shareholders' equity
statement, I include the most widely used terminal value estimation methods, such as the P/B, P/E
and free cash #ow method.
the link between &bottom line' numbers and "rm value under unbiased ac-
counting.
Observation 2. Given unbiased accounting, i.e.,
lim
O`
E
R
[
&
oa
R>O
]/E
R
[O
]"1,
then
lim
O`
E
R
[
&
ox
R>O
!c
R>O
]/E
R
[O
]"1, where ,R/(R!1);
and
lim
O`
E
R
[w(
&
ox
R>O
!c
R>O
)#(1!w)
&
oa
R>O
]/E
R
[O
]"1 for any w.
Observation 2 states that when accounting is unbiased, both the balance sheet
approach (which uses book value as the estimator of market value) and the
income statement approach (which uses capitalized earnings as the estimator of
market value) are unbiased. These two approaches become perfect substitutes
asymptotically, and any convex combination of them also yields an unbiased
estimate of "rm value.
4.1. Balance sheet approach vs. income statement approach under conservative
accounting
When accounting is conservative, by de"nition, the balance sheet approach is
subject to asymptotic downward bias. However, the properties of the income
statement approach are more complicated because of growth. The following
corollary states the result.
Corollary 1. Assume regularity conditions (3) and (4) hold. Given conservative
accounting, we have
lim
O`
E
R
[
&
ox
R>O
!c
R>O
]/E
R
[O
]
"1 when g"0,

(1 when g'0.
Corollary 1 states that, with zero growth, capitalized earnings asymptotically
equal "rm value. This result follows immediately from statement (9) of Proposi-
tion 1: zero-growth implies that "rm's earnings on average equal its economic
income; therefore, capitalized earnings provide a good indicator of "rm value.
Corollary 1 also shows that the income statement approach is no longer
unbiased when growth is positive. In fact, under such circumstances, capitalized
earnings are asymptotically less than "rm value. The reason is intuitive: with
positive growth, errors due to past and present conservatism in accounting only
partially cancel each other.
Even though the strict canceling-error argument no longer holds when
growth is positive, the fact that measurement errors are still partially o!setting
in the income statement suggests that capitalized earnings on average provide
a less biased estimate of "rm value than book value does. Formally, one would
hypothesize that
"E
R
[O
!(
&
ox
R>O
!c
R>O
)]"/"E
R
[O
!
&
oa
R>O
]"(1 as PR. (12)
Recall that when accounting is conservative, both terms inside the absolute signs
are positive as PR; therefore, Inequality (12) is equivalent to
E
R
[
&
oa
R>O
]/E
R
[
&
ox
R>O
!c
R>O
](1 as PR, (13)
which states that capitalized earnings are on average greater than book value.
Lemma 1. Assume regularity conditions (3) and (4). Given conservative accounting,
Inequality (13) holds. Hence,
lim
O`
"E
R
[O
!(
&
ox
R>O
!c
R>O
)]"/"E
R
[O
!
&
oa
R>O
]"(1.
Lemma 1 allows us to compare the balance sheet approach with the income
statement approach under conservative accounting. It shows that capitalized
earnings provide an asymptotically less biased estimate of market value than
book value does.
4.2. Convex combination of book value and capitalized earnings
Because capitalized earnings asymptotically di!er from book value when
accounting is conservative, one can express "rm value as a convex combination
of these two accounting measures. The result of Lemma 1 suggests that, in such
a scheme, more weight would be placed on capitalized earnings due to conserva-
tism in accounting.
Proposition 2. Assume regularity conditions (3) and (4) hold. Suppose there exists
a weight (w) such that
lim
O`
E
R
[(1!w)
&
oa
R>O
#w(
&
ox
R>O
!c
R>O
)]/E
R
[O
]"1. (14)
Then conservative accounting implies
w"
(R!1)(1#g)
R!(1#g)
where w'1 ("1) when g'0 ("0).
In contrast, when accounting is unbiased, (14) holds for all w.
Proposition 2 shows that, under conservative accounting, "rm growth
plays an important role in combining earnings and book value in valuation.
In the weighted average model stated in (14), the weight on capitalized earnings
(w) is an increasing and convex function of the growth rate (g). When g is
positive, the weight on capitalized earnings is not only positive, but also greater
than one.
To understand the close relation between the weight coe$cient and the
growth rate, note that, E
R
[(1!w)
&
oa
R>O
#w(
&
ox
R>O
!c
R>O
)],E
R
[
&
oa
R>O
#
&
ox
?
R>O
], where residual earnings (ox?
R
) is de"ned as ox
R
!(R!1)oa
R
, and
,w/(R!1). One can therefore transformthe weighted average formula of (14)
into the following format:
lim
O`
E
R
[
&
oa
R>O
#
&
ox
?
R>O
]/E
R
[O
]"1. (15)
The underpinning of Eq. (15) is the following well-known formula which ex-
presses market value in terms of book value plus the present value of expected
future residual earnings:
<
R
,oa
R
#
`
O
E
R
[
&
ox
?
R>O
]/RO. (16)
The next corollary shows how conservative accounting on average a!ects the
asymptotic dynamics of residual earnings.
Corollary 2. Assume regularity conditions (3) and (4) hold.
;nder conservative accounting, lim
O`
E
R
[
&
ox
?
R>O>
]
E
R
[
&
ox
?
R>O
]
"1#g. (17)
;nder unbiased accounting, lim
O`
E
R
[
&
ox
?
R>O>
]
E
R
[
&
ox
?
R>O
]
(1#g when exists.
` Penman (1998a) hypothesizes a similar result regarding residual earnings dynamics. O'Hanlon
(1994) also shows that asymptotic residual earnings are positive with certain type of conservative
accounting policy. Unlike O'Hanlon (1994) which is based on speci"c assumptions regarding
accounting policies and residual earnings dynamics, this study relies on more basic accounting and
economics principles and emphasizes the generality of the result.
Corollary 2 shows that conservative accounting causes the residual earnings
to be on average positive and to grow at a rate greater than zero.` In contrast,
when accounting is unbiased, residual earnings would either grow/decay at an
asymptotic rate that is less than g, or they would satisfy the following condition:
'0 such that E
R
[
&
ox
?
R>O
]"0 for all *,
in which case lim
O`
E
R
[
&
ox
?
R>O>
]/E
R
[
&
ox
?
R>O
] is not de"ned.
Substituting Eq. (17) into (16), it is easy to show that Eq. (15) holds. From this
analysis, one sees clearly how the weight coe$cient (w) links to growth (g)
through the capitalization factor ,w/(R!1)"(1#g)/(R!1!g).
Another interesting aspect about the weighted average model is that the
weight on book value, 1!w"!Rg(R!(1#g)), is zero (negative) when
growth is zero (positive). Such a non-positive coe$cient may seem surprising,
but a close examination reveals the logic behind the result. To interpret the
non-positive coe$cient on book value, one can transform the weighted average
formula of (14) into the following equivalent expression:
lim
O`
E
R
[
&
ox
R>O
!(1#g)g
&
oa
R>O
]/E
R
[O
]"1. (18)
Expression (18) illustrates the weighted average formula from a &buying earn-
ings' perspective. The underpinning of this expression can be obtained by
substituting (2) into (1):
<
R
"
`
O
E
R
[
&
ox
R>O
]/RO!
`
O
E
R
[
&
oa
R>O
!
&
oa
R>O
]/RO, (19)
which expresses "rm value as present value of expected earnings, adjusted for
book value growth. This relation can be conceptualized as if the market is
buying the "rm's future earnings, and a premium is given to those streams of
earnings that require less future capital infusion in terms of growth in book
value. Using the steady-state conditions and Eq. (14), it is straightforward to
show that (18) holds asymptotically. Unlike the &buying book value' perspective
taken in (4), the core component of (18) is a multiple of earnings. The term
(1#g)gE
R
[
&
oa
R>O
] is subtracted because gE
R
[
&
oa
R>O
] captures asymptotic
growth in book value. Hence a negative coe$cient on book value represents
adjustments for investment in operating assets that are needed to generate the
stream of expected future earnings.
4.3. General linear combinations of capitalized earnings and book value
In this subsection I consider more general linear schemes that combine
earnings and book value in valuation:
lim
O`
(w
?
E
R
[
&
oa
R>O
]#w
V
E
R
[
&
ox
R>O
!c
R>O
])/E
R
[O
]"1.
This class of valuation models include not only the weighted average model
discussed earlier, but also other interesting models such as the earnings-multiple
method (w
V
'0, w
?
"0) and the book-value-multiple method (w
V
"0, w
?
'0).
The purpose of the analysis is to show that the weighted average model has
a unique feature: its weight coe$cients are immune to the degree of conserva-
tism in accounting.
Suppose the total of the two weight coe$cients equals s, which may di!er
from one. That is,
w
?
#w
V
"s.
De"ne the asymptotic P/B ratio as
N@
,lim
O`
E
R
[O
]/E
R
[
&
oa
R>O
]. As shown in
the proof of Proposition 2, w
V
and w
?
can be explicitly solved as functions of
s and
N@
:
w
V
"
(
N@
!s)(R!1)(1#g)
(
N@
!1)(R!1!g)
and w
?
"s!w
V
. (20)
It is easy to see from (20) that
w
V
'0, w
?
(0 when s(
NC
;
w
V
*0, w
?
*0 when
NC
)s)
N@
;
w
V
(0, w
?
'0 when s'
N@
,
where
NC
,lim
O`
E
R
[O
]/E
R
[
&
oa
R>O
!c
R>O
] is the asymptotic P/Cap.E ratio.
Hence if one places no restriction on the sum of the two weights, the coe$cient
on book value can be positive.
Although s"1 is only one of many possible alternatives, comparing the result
of Proposition 2 with expressions in (20) reveals a unique characteristic of the
strict weighted average model.
Corollary 3. The weights w
V
and w
?
are independent of
N@
if (and only if ) s"1.
The asymptotic price-to-book ratio (
N@
) is a function of growth, the discount
rate and the degree of conservatism in accounting policies. Corollary 3 shows
that if (and only if ) s"1, the relative weights (w
V
, w
?
) are functions only of
growth and the discount rate, and they are immune to the degree of conserva-
tism.
The immunity of weights to the degree of conservatism is another important
aspect of the strict weighted average model. When growth is positive, a more
conservative accounting policy yields a lower book value and lower earnings.
However, because measurement errors due to conservatism cancel to some
extent in the income statement, book value and capitalized earnings are a!ected
di!erently. When the weights are chosen in such a fashion to incorporate growth
&correctly', the two e!ects cancel in the strict weighted average model.
5. E4ects of leverage
To this point the paper has assumed that the "rm's operation is entirely equity
"nanced. In this section I assume that the "rm also engages in debt "nancing
activities, in which case operating cash #ows may di!er from cash #ows to/from
the owner. The following notations are used:
bv
R
book value of equity at time t;
fa
R
net "nancial assets at time t;
P
R
market value of equity at time t;
x
R
accounting earnings during period t;
i
R
net interest income during period t;
d
R
net dividend during period t.
I assume that the "rm's book value equals the total of "nancial and operating
assets at all times:
bv
R
"fa
R
#oa
R
.
Financing activities are assumed to involve assets that have relatively perfect
markets such that the following net interest relation is satis"ed:
i
R
"(R!1) fa
R
. (21)
Accounting for "nancial assets is assumed to satisfy the following "nancial
assets relation:
fa
R
"fa
R
#i
R
!(d
R
!c
R
). (22)
Unlike the measurement of "nancing activities, assumed to be unbiased,
accounting for operating activities is assumed to be conservative. Book value of
equity and earnings are simple combinations of two fundamentally di!erent
kinds of measures. How the resulting accounting data relate to market value of
equity is the subject of this section.
Observation 3. Dexne ,(1#g)(R!(1#g)) and w,(R!1). If
E
R
[
&
ox
R>O>
]
E
R
[
&
oa
R>O
]
"ox
R
/oa
R
and
E
R
[
&
oa
R>O>
]
E
R
[
&
oa
R>O
]
"oa
R
/oa
R
for all *0, (23)
then
w(ox
R
!c
R
)#(1!w)oa
R
#fa
R
"P
R
, (24)
and
w(x
R
!d
R
)#(1!w)bv
R
"P
R
. (25)
Expression (24) separates "nancing activities and operating activities in valu-
ation. As discussed in Section 4, valuing operating assets involves extrapolation
of residual operating earnings based on the growth rate of operating assets:
w(ox
R
!c
R
)#(1!w)oa
R
equals "rm value when the "rm's operating activities
are on a steady-state trajectory. Contrary to this key role played by the growth
rate of operating assets, growth of "nancial assets does not matter in valuation.
Eq. (24) holds regardless of whether the "rm's "nancing activities are in a steady
state or not. Because of assumptions (21) and (22), all value-relevant information
regarding "nancial assets is summarized in the balance sheet data, fa
R
.
To understand the aggregation that takes place in (25), observe that assump-
tion (21) implies that "nancial assets generate zero residual earnings. This result
implies that residual earnings are entirely attributable to operating activities, i.e.,
x?
R
"ox?
R
. Hence, the two sets of accounting measures can be aggregated despite
the fact that they are quite di!erent in terms of bias.
Condition (23) holds asymptotically, which leads to the following proposition.
Proposition 3. Assume that the regularity conditions (3) and (4) hold. Dexne
leverage as
RO
,!E
R
[
&
fa
R>O
]/E
R
[
&
bv
R>O
]. Assume further that leverage con-
verges to
R
as PR. Given conservative accounting, if
R
'0 then
lim
O`
E
R
[PI
R>O
]/E
R
[
&
bv
R>O
]'lim
O`
E
R
[O
]/E
R
[
&
oa
R>O
]'1;
lim
O`
E
R
[PI
R>O
#dI
R>O
]/E
R
[x
R>O
]
'lim
O`
E
R
[O
#c
R>O
]/E
R
[
&
ox
R>O
]'R/(R!1) when g'0,
"lim
O`
E
R
[O
#c
R>O
]/E
R
[
&
ox
R>O
]"R/(R!1) when g"0,
lim
O`
E
R
[x
R>O
]/E
R
[
&
bv
R>O
]'lim
O`
E
R
[
&
ox
R>O
]/E
R
[
&
oa
R>O
]'R!1.
` Francis and Schipper (1999) run cross-sectional regressions of market value on earnings and
book value. Although they do not place any restriction on the sum of the coe$cients and they allow
for an intercept, negative coe$cients on book values appear in several regression results. Amir and
Lev (1996) document signi"cant negative coe$cients on book value after controlling for growth.
And
lim
O`
E
R
[(1!w)
&
bv
R>O
#w(x
R>O
!dI
R>O
)/E
R
[PI
R>O
]"1,
where
w"
(R!1)(1#g)
R!(1#g)
.
Note that P
R
and bv
R
denote the market and book value of equity, whereas
<
R
and oa
R
denote the market and book value of the "rm's (net) operating assets.
Similarly x
R
denotes the earnings and ox
R
denotes the "rm's operating income.
Proposition 3 shows that positive leverage causes the asymptotic P/B, P/E and
return on equity to further exceed the "rms' un-leveraged price-to-book, price-
to-earnings and return on (net) operating assets, which are already beyond their
respective benchmark levels due to conservatism and growth. However, the
asymptotic weights to combine capitalized earnings and book value are not
a!ected by the "rm's "nancing policy.
6. Empirical implications
Proposition 2 yields a compelling and interesting empirical implication: if one
expresses a "rm's market value as a strict weighted average of its book value and
capitalized earnings, the weight on the capitalized earnings will be, on average,
greater than one, and the weight on book value will be negative. Penman (1998b)
examines the weighted average model and documents negative coe$cients on
book value. The result also bears on market-based accounting research that
involves regressing market value on book value and earnings. Several papers,
including Amir and Lev (1996) and Francis and Schipper (1999), document
negative regression coe$cients on book value in certain years.`
The analysis in this paper also has implications for the estimation of terminal
value in equity valuation. The term &terminal value' is used to refer to either the
value of equity or the value of goodwill at the end of the forecast horizon. I show
that one can adjust for the e!ect of conservatism by taking a convex combina-
tion of book value and capitalized earnings, and the relative weight on capital-
ized earnings increases with the growth rate. Although, depending on the length
of forecasts, a "rm may not be expected to be on its steady-state trajectory at the
" For social, legal, and contractual reasons for the existence of conservative accounting, see, for
example, Devine (1963), Antle and Lambert (1988), Dutta and Zhang (2000).
` See Penman (1998b) and Burgstahler (1998) for discussions regarding the integration of
earnings and book value in equity valuation.
truncation year, the result can still serve as useful benchmarks. Corollary
2 suggests that asymptotically residual earnings are expected to grow at approx-
imately the same rate that "rm values grow. In light of this result, estimating
terminal year's goodwill by assuming that residual earnings beyond the forecast
horizon follow either a randomwalk or strictly decaying process would generate
downward bias if "rms are expected to grow beyond the forecast horizon.
7. Concluding remarks
This paper examines the link between accounting data and "rm value under
conservative accounting. Existence of conservative practices in accounting is
assumed, and its motivation is not modeled. Generally speaking, conservatism
arises from considerations such as reliability, which is beyond the scope of this
paper."
This study contributes to the accounting literature in three ways. First, it
provides a unifying framework that integrates di!erent aspects of conservative
accounting. Second, in addition to the various economic reasons given in the
literature regarding the complementarity between earnings and book value in
"rm valuation, the study demonstrates that conservatism in accounting also
causes capitalized earnings to di!er from book value asymptotically.` The
analysis further shows that capitalized earnings on average provide a less biased
estimate of "rm value than book value does. Third, under conservative ac-
counting, "rm growth is shown to play an important role in combining book
value and earnings in equity valuation.
This paper focuses on the long-term steady-state relations among earnings,
book value, dividends and equity value. These asymptotic results are useful
because they provide a benchmark for research that relates earnings, book value
and dividends to market value. Understanding the asymptotic relations among
bottom line numbers helps forecasting long-term realization of accounting data,
and the link between accounting data and equity value in a steady state may
serve as an underpinning for pro forma analysis. One extension of this paper is
to analyze non-steady-state situations by explicitly modeling "rm transactions
and accounting policies. Results of this paper can serve as a springboard for
non-asymptotic studies. Another potential extension of this paper is to distin-
guish di!erent kinds of conservative accounting, including conservative
accumulation of accruals and conservative release of accruals. Such an exercise
would help us understand how conservatism a!ects the prediction of future
earnings and book rate of return, and how it a!ects the relation between current
accounting data and "rm value.
Appendix
Proof of Proposition 1.
Part A: (8) 0 (9)
Step A.1.: (8) N(9)
De"ne
@N
,lim
O`
(E
R
[
&
oa
R>O
]/E
R
[O
]). Using the clean surplus relation
(2) we get
E
R
[
&
oa
R>O>
]
E
R
[O>
]
"
E
R
[
&
oa
R>O
]#E
R
[
&
ox
R>O>
]!E
R
[c
R>O>
]
E
R
[O>
]
.
Add and subtract
@N
on the right-hand side,
E
R
[
&
oa
R>O>
]
E
R
[O>
]
"
@N
#
E
R
[
&
oa
R>O
]#E
R
[
&
ox
R>O>
]!E
R
[c
R>O>
]!
@N
E
R
[O>
]
E
R
[O>
]
.
Substitute E
R
[O>
]"E
R
[O
]#E
R
[
&
oe
R>O>
]!E
R
[c
R>O>
] into the right-
hand side numerator:
E
R
[
&
oa
R>O>
]
E
R
[O>
]
"
@N
#
E
R
[
&
oa
R>O
]!
@N
E
R
[O
]
E
R
[O>
]
#
E
R
[
&
ox
R>O>
]!
@N
E
R
[
&
oe
R>O>
]
E
R
[O>
]
!
(1!
@N
)E
R
[c
R>O>
]
E
R
[O>
]
"
@N
#
E
R
[
&
oa
R>O
]!
@N
E
R
[O
]
E
R
[O
]
E
R
[O
]
E
R
[O>
]
#
E
R
[
&
ox
R>O>
]!
@N
E
R
[
&
oe
R>O>
]
E
R
[
&
oe
R>O>
]
;
E
R
[
&
oe
R>O>
]
E
R
[O>
]
!
(1!
@N
)E
R
[c
R>O>
]
E
R
[O>
]
.
Take limits on both sides and note that (3), (4) and E
R
[O>
]"
E
R
[O
]#E
R
[
&
oe
R>O>
]!E
R
[c
R>O>
] imply
lim
O`
E
R
[O>
]
E
R
[O
]
"1#g;
lim
O`
E
R
[
&
oe
R>O>
]
E
R
[O>
]
"
R!1
1#g
;
lim
O`
E
R
[c
R>O>
]
E
R
[O>
]
"
R!1!g
1#g
,
all of which are "nite. We now get
@N
"
@N
#0
1
1#g
#
lim
O`
E
R
[
&
ox
R>O>
]
E
R
[
&
oe
R>O>
]
!
@N
R!1
1#g
!(1!
@N
)
R!1!g
1#g
.
Hence
lim
O`
E
R
[
&
ox
R>O>
]
E
R
[
&
oe
R>O>
]
"1!
g
R!1
(1!
@N
).
De"ne
VC
,lim
O`
E
R
[
&
ox
R>O
]
E
R
[
&
oe
R>O
]
.
Thus
VC
"1!
g
R!1
(1!
@N
). (A.1)
Since
@N
(1, we get
VC
(1 when g'0,
"1 when g"0.
Step A.2.: (9) N (8). Proof is by contradiction. Supposing
@N
,lim
O`
(E
R
[
&
oa
R>O
]/E
R
[O
])*1, we can repeat the proof in Step A.1 and
get
VC
"1!
g
R!1
(1!
@N
).
Therefore,
(a) If
@N
"1, then
VC
"1 regardless of g;
(b) If
@N
'1, then
VC
'1 when g'0,

"1 when g"0.
Both cases contradict (9). Therefore, we have
@N
,
E
R
[
&
oa
R>O
]
E
R
[O
]
(1.
Based on results of Steps A.1 and A.2 we conclude that (8) 0 (9).
Part B: (8) 0 (10)
Step B.1.: (8) N(10).
We know from (A.1) that
VC
"1!
g
R!1
(1!
@N
),
which implies (and is implied by)
VC
!
@N
"
1!
g
R!1
(1!
@N
).
Since (1) and (3) assume 1#g(R, and (8) requires
@N
(1, we conclude that
VC
!
@N
'0, i.e., lim
O`
E
R
[
&
ox
R>O
]
E
R
[
&
oe
R>O
]
'lim
O`
E
R
[
&
oa
R>O
]
E
R
[O
]
.
Multiplying both sides by
lim
O`
E
R
[
&
oe
R>O
]
E
R
[O
]
and lim
O`
E
R
[O
]
E
R
[
&
oa
R>O
]
,
we get
lim
O`
E
R
[
&
ox
R>O
]
E
R
[
&
oa
R>O
]
'lim
O`
E
R
[
&
oe
R>O
]
E
R
[O
]
"R!1.
Step B.2.: (10) N(8). Proof is by contradiction. Supposing
@N
,lim
O`
E
R
[
&
oa
R>O
]
E
R
[O
]
*1,
we can then repeat the proof in Step B.1 and get
VC
!
@N
"
1!
g
R!1
(1!
@N
).
If
@N
*1, then
VC
!
@N
)0, which implies
lim
O`
E
R
[
&
ox
R>O
]
E
R
[
&
oa
R>O
]
)lim
O`
E
R
[
&
oe
R>O
]
E
R
[
&
oa
R>O
]
"R!1.
This contradicts (10). Therefore, (10) N(8).
Based on results of Steps B.1 and B.2, we conclude that (8) 0 (10).
Parts A and B complete the proof of Proposition 1.
Proof of Corollary 1. Follows directly from Proposition 2.
Proof of emma 1. De"ne ROA
RR>O
,E
R
[
&
ox
R>O
]/E
R
[
&
oa
R>O
]. Then
E
R
[
&
ox
R>O
!c
R>O
]/E
R
[
&
oa
R>O
]
"
R
R!1
ROA
RR>O
E
R
[
&
oa
R>O
]/E
R
[
&
oa
R>O
]!E
R
[c
R>O
]/E
R
[
&
oa
R>O
]. (A.2)
Clean surplus relation (2) implies that
E
R
[
&
oa
R>O
]"E
R
[
&
oa
R>O
]#E
R
[
&
ox
R>O
]!E
R
[c
R>O
]
"E
R
[
&
oa
R>O
](1#ROA
RR>O
)!E
R
[c
R>O
]. (A.3)
Substituting (A.3) into (A.2) and simplifying the expression we get
E
R
[
&
ox
R>O
!c
R>O
]/E
R
[
&
oa
R>O
]!1"
E
R
[
&
oa
R>O
]
E
R
[
&
oa
R>O
]
ROA
RR>O
R!1
!1
. (A.4)
Given conservative accounting, we know from Proposition 1
lim
O`
E
R
[
&
ox
R>O
]
E
R
[
&
oa
R>O
]
'R!1.
It is easy to show that, for any time t realization, there exists '0 such that for
all *, the right-hand side of (A.4) is greater than 0.
Therefore, we get
lim
O`
E
R
[
&
oa
R>O
]
E
R
[
&
ox
R>O
!c
R>O
]
(1.
Proof of Proposition 2. Given conservative accounting, Lemma 1 implies that
lim
O`
E
R
[
&
ox
R>O
!c
R>O
!
&
oa
R>O
]'0.
Therefore, for any s3R, there exists '0 such that for all * we can
"nd w
?R>O
and w
VR>O
which satisfy E
R
[O
]"w
?R>O
E
R
[
&
oa
R>O
]#
w
VR>O
(E
R
[
&
ox
R>O
]!E
R
[c
R>O
]) and w
?R>O
#w
VR>O
"s.
This implies
1"w
?R>O
E
R
[
&
oa
R>O
]/E
R
[O
]#w
VR>O
(E
R
[
&
ox
R>O
]!E
R
[c
R>O
])/E
R
[O
].
Taking limits on both sides and solving for w
?
and w
V
, we get
w
V
"
(
N@
!s)(R!1)(1#g)
(
N@
!1)(R!1!g)
,
w
?
"s!w
V
. (A.5)
Substituting s"1 into (A.5) we get
w
V
"
(R!1)(1#g)
R!(1#g)
and w
?
"!
Rg
R!(1#g)
.
Proof of Corollary 2. De"ne goodwill gw
RR>O
,E
R
[O
]!E
R
[
&
oa
R>O
].
If any one of the three statements ((8)}(10)) holds, then from Proposition 2 we
know
lim
O`
E
R
[
&
ox
?
R>O
]
E
R
[O
!
&
oa
R>O
]
"
R!(1#g)
1#g
,
i.e.,
lim
O`
E
R
[
&
ox
?
R>O
]
gw
RR>O
"
R!(1#g)
1#g
. (A.6)
By de"nition, gw
RR>O
,E
R
[
&
ox
?
R>O>
]/R#gw
RR>O>
/R. Hence
gw
RR>O
gw
RR>O>
"
1
R
1#
E
R
[
&
ox
?
R>O>
]
gw
RR>O>

.
Taking limits on both sides and using result (A.6) we get
lim
O`
gw
RR>O
gw
RR>O>
"
1
1#g
.
Therefore,
lim
O`
E
R
[
&
ox
?
R>O>
]
E
R
[
&
ox
?
R>O
]
"lim
O`
E
R
[
&
ox
?
R>O>
]
gw
RR>O>
)
gw
RR>O>
gw
RR>O
)
gw
RR>O
E
R
[
&
ox
?
R>O
]
"1#g.
The claim that, under unbiased accounting, lim
O`
E
R
[
&
ox
?
R>O>
]/E
R
[
&
ox
?
R>O
](1#g
can be easily proved by contradiction.
Proof of Corollary 3. Result follows directly from Eq. (20).
Proof of Proposition 3. Results follow directly from Proposition 2 and the
following relations:
P
R
/bv
R
"<
R
/oa
R
#
R
;(<
R
/oa
R
!1);
(P
R
#d
R
)/x
R
"(<
R
#fa
R
#d
R
)/(ox
R
#i
R
);
x
R
/bv
R
"ox
R
/oa
R
#
R
;(ox
R
/oa
R
!(R!1)).
References
Amir, E., Lev, B., 1996. Value-relevance of non"nancial information: the wireless communications
industry. Journal of Accounting and Economics 22, 3}30.
Antle, R., Lambert, R., 1988. Accountants' loss functions and induced preferences for conservatism.
In: Feltham, G., Amershi, A., Ziemba, W. (Eds.), Economic Analysis of Information and
Contract: Essays in Honor of John. E. Butterworth. Kluwer Academic Publishers, Boston, MA.
Basu, S., 1997. The conservatism principle and the asymmetric timeliness of earnings. Journal of
Accounting and Economics 24, 3}37.
Burgstahler, D., 1998. Discussion of combining earnings and book value in equity valuation.
Contemporary Accounting Research 15, 325}341.
Copeland, T., Koller, T., Murrin, J., 1994. Valuation: Measuring and Managing the Value of
Companies, 4th Edition. Wiley, New York.
Davidson, S., Stickney, C., Weil, R., 1982. Financial Accounting, 3rd Edition. The Dryden Press,
Chicago, IL.
Devine, C., 1963. The role of conservatism reexamined. Journal of Accounting Research 1, 127}138.
Dutta, S., Zhang, X., 2000. Revenue recognition in a multiperiod agency setting. Unpublished
working paper. University of California, Berkeley.
Feltham, G., Ohlson, J., 1995. Valuation and clean surplus accounting for operating and "nancial
activities. Contemporary Accounting Research 11, 689}731.
Feltham, G., Ohlson, J., 1999. Residual earnings valuation with risk and stochastic interest rates.
Accounting Review 74, 165}183.
Financial Accounting Standards Board, 1980. Statement of Financial Accounting Concepts No. 2.
Irwin, Chicago, IL.
Francis, J., Schipper, K., 1999. Have "nancial statements lost their relevance?. Journal of Accounting
Research 37, 319}352.
Frankel, R., Lee, C., 1998. Accounting valuation, market expectation, and cross-sectional stock
returns. Journal of Accounting and Economics 25, 282}319.
Lee, C., Myers, J., Swaminathan, B., 1999. What is the intrinsic value of the dow?. Journal of Finance
54, 1693}1741.
Miller, M., Modigliani, F., 1961. Dividend policy, growth and the value of shares. Journal of
Business 34, 411}433.
O' Hanlon, J., 1994. Earnings based valuation models with conservative accounting. Unpublished
working paper. Lancaster University.
Ohlson, J., Zhang, X., 1998. Accrual accounting and equity valuation. Journal of Accounting
Research 36, 85}111.
Ohlson, J., Zhang, X., 1999. On the theory of forecast horizon in equity valuation. Journal of
Accounting Research 37, 437}449.
Penman, S., 1998a. A synthesis of equity valuation techniques and the terminal value calculation for
the dividend discount model. Review of Accounting Studies 2, 303}323.
Penman, S., 1998b. Combining earnings and book value in equity valuation. Contemporary
Accounting Research 15, 291}324.
Penman, S., Sougiannis, T., 1998. A comparison of dividend, cash #ow, and earnings approaches to
equity valuation. Contemporary Accounting Research 15, 343}383.

Zhang 2000

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Zhang 2000

Hochgeladen von

Copyright:

Verfügbare Formate

I wish to thank Ray Ball (the editor), Trevor Harris, Amir Ziv, an anonymous referee,

"1 when g"0,

'1 when g'0,

Das könnte Ihnen auch gefallen