Residual income

We show that project evaluation should be based on free cash flows at nominal prices. We present a case where the results from the constant price method are biased upwards and there is a risk to accept bad projects. It is a widespread practice to evaluate projects at constant prices. With an example presented in the training on economic regulation of public utilities developed by the World Bank Institute we asses that methodology. We show an overvaluation of 21% when compared with the current prices methodology and using a correct Weighted Average Cost of Capital, WACC. World Bank, regulatory policy for infrastructure, developing countries, project evaluation, project appraisal, firm valuation, cost of capital, cash flows, free cash flow, capital cash flow RESUMEN En este trabajo mostramos que la evaluación de proyectos debe hacerse con base en flujos de caja calculados a precios corrientes o nominales. Presentamos un caso donde los resultados obtenidos con el método de precios constantes están sobre estimados y existe por tanto, el riesgo de aceptar malos proyectos como buenos. Evaluar proyectos con flujos a precios constantes es una práctica muy generalizada. Se trabaja y evalúa un ejemplo desarrollado por encargo del World Bank Institute y presentado como caso en el entrenamiento de consultores y asesores en regulación de de empresas de infraestructura. Se muestra que en ese caso hay una sobre valoración del 21% cuando se compara con los resultados calculados a precios corrientes o nominales y cuando se utiliza un Costo Promedio Ponderado de Capital (CPPC) (Weighted Average Cost of Capital, WACC) correcto. World Bank, Banco Mundial, políticas de regulación, infraestructura, países en desarrollo, evaluación de proyectos, valoración de empresas, costo de capital, flujos de caja, flujo de caja libre, flujo de caja de capital.

This paper provides an empirical assessment of the residual income valuation model proposed in Ohlson (Ohlson, J.A., 1995. Earnings, book values and dividends in security valuation. Contemporary Accounting Research 11, 661-687). We point out that existing empirical research relying on Ohlson's model is similar to past research relying explicitly on the dividend-discounting model. We establish that the key original empirical implications of Ohlson's model stem from the information dynamics that link current information to future residual income. Our empirical results generally support Ohlson's information dynamics. However, we find that our empirical implementation of Ohlson's model provides only minor improvements over existing attempts to implement the dividend-discounting model by capitalizing short-term earnings' forecasts in perpetuity.

Zaključna projektna naloga predstavlja problem plačilne nediscipline v slovenskem gospodarstvu. Podjetja morajo predvidevati finančna tveganja, zagotavljati zadostne likvidnostne rezerve, ustrezno zavarovati svoje terjatve, se informirati o poslovnih partnerjih pred sklenitvijo poslov, skupno ustvariti preventivni sistem, da se ne znajdejo v težavah. Nujno potreben je tudi vpogled v samo zakonodajo države, ki je potrebna reform, da bi se problem plačilne nediscipline pričel reševati in izkoreninjati iz slovenskega gospodarstva. Na podlagi raziskave na omejenem vzorcu sedmih podjetij ter intervjuja z direktorjem savinjskošaleške gospodarske zbornice smo ugotovili, da je problem plačilne nediscipline v slovenskem gospodarstvu še kako prisoten. Ključne besede: plačilna nedisciplina, plačilna sposobnost, plačilna nesposobnost, financiranje poslovanja podjetja, finančno tveganje, zavarovanje terjatev, bonitetna ocena, večstranski pobot obveznosti, kapitalska ustreznost, poslovna kultura.

In the last years, Spanish firms have attempted to create value for their shareholders.The market value added (MVA) has been proposed by the Stern Stewart Consulting Group asa measure of value creation, and the economic value added (EVA) as an operating measure toimplement this new management philosophy. In this paper, an empirical analysis about therelationship between MVA and several performance

Este artigo utiliza a metodologia de Fama e French (1999) para estimar o custo geral de capital e o retorno sobre o custo dos investimentos de um projeto que agrega as empresas não financeiras listadas na Bolsa de Valores de São Paulo (Bovespa) entre os finais de 1994 e 2008. Comparados às taxas médias anuais de 11,02% da Taxa de Juros de Longo Prazo (TJLP) e de 21,89% da taxa do Serviço Especial de Liquidação e Custódia (SELIC), as estimativas do custo de capital e do retorno do investimento foram de, respectivamente, 15,45% e 13,42%, configurando um cenário de baixos rendimentos para o investimento efetuado no período. Excluindo-se os setores de intensa participação estatal, os negócios privados obtiveram um retorno nominal anual de 14,59% e, com um custo do capital de 10,86%, adicionaram um valor médio de 3,36% ao ano sobre o custo de capital. Tão interessante quanto essas taxas internas de retorno (TIRs) são os históricos de resultados, decisões de financiamento e de investimento do setor corporativo brasileiro no período. * Os autores agradecem a Marco Antônio Cavalcanti (editor), José F. Barbachan (Faculdades IBMEC Rio de Janeiro) e Antônio Z. Sanvicente (Insper) pelos comentários, e a dois pareceristas anônimos que muito contribuíram para o aprimoramento deste artigo. Todas as imprecisões remanescentes são de inteira responsabilidade dos autores. ** Professor do Insper e pesquisador do Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) (processo n o. 309602/2003-3).

During the last few years, the importance of the research on Bowman's Paradox -the negative relationship between accounting measures of risk and return- has grown. Nevertheless, research has mostly been focused on studying the causes of the negative accounting relation, instead of explaining how, two different types of risk-return relationship can coexist: negative for the accounting indicators and positive for the market indicators. In this study, we develop a mathematical model, based on the Residual income Valuation Model for making both kinds of relations compatible. Our results show that there exists a positive relationship between the accounting measures of risk and the market measures of risk and return, but a negative influence of the accounting profitability on both market variables.

En los últimos años ha cobrado importancia el estudio de la "Paradoja de Bowman", es decir, la correlación negativa existente entre las medidas de rentabilidad y riesgo obtenidas a partir de las cifras contables. No obstante, la investigación se ha centrado más en analizar las causas de esta relación que en explicar cómo pueden coexistir dos tipos distintos de relación rentabilidad-riesgo: negativa para los indicadores contables y positiva para los indicadores de mercado. En este trabajo desarrollamos un modelo matemático que compatibiliza ambas relaciones. Las conclusiones obtenidas en el modelo señalan hacia una relación positiva entre las medidas obtenidas en el mercado de capitales y el riesgo medido con cifras contables, así como una relación negativa entre las primeras y la rentabilidad calculada contablemente.

This paper provides an empirical assessment of the residual income valuation model proposed in Ohlson (Ohlson, J.A., 1995. Earnings, book values and dividends in security valuation. Contemporary Accounting Research 11, 661-687). We point out that existing empirical research relying on Ohlson's model is similar to past research relying explicitly on the dividend-discounting model. We establish that the key original empirical implications of Ohlson's model stem from the information dynamics that link current information to future residual income. Our empirical results generally support Ohlson's information dynamics. However, we find that our empirical implementation of Ohlson's model provides only minor improvements over existing attempts to implement the dividend-discounting model by capitalizing short-term earnings' forecasts in perpetuity.

Using a variance decomposition approach, we document that earnings forecasts and the discount rate implied in P/E ratio forecasts are both important in driving target price revisions during the sample period (1999 through 2011). Earnings forecasts are more important for companies with smaller market capitalization, higher book-to-market, slower sales growth, and lower past returns. However, a target price-based trading strategy produces a significant risk-adjusted profit when target price revisions are driven not only by revisions in earnings forecasts, but also by revisions in discount rates. This evidence suggests that equity analysts provide informative forecasts about discount rates implied in P/E ratio in addition to earnings. JEL Classification: G10, G14, G24

Using no-arbitrage arguments in an M & M world, we show that in the N-period case, the appropriate discount rate for the tax shield is rho, the return to unlevered equity. We make no assumption about the appropriate discount rate for the tax shield. Instead, the appropriate discount rate for the tax shield is deduced from the no-arbitrage arguments. Furthermore, it is shown that the appropriate discount rate for the tax shield does not depend on whether the value of the debt is a fixed amount or is a fixed proportion of the levered value of the firm. The analysis begins at the end of the penultimate period N-1. First, we assume that the value of the levered cash flow is higher than the sum of the value of the unlevered cash flow and the value of the tax shield. It is shown that the inequality cannot hold because arbitrage opportunities exist. The equality only holds if the discount rate for the tax shield is rho, the return to unlevered equity. Second, we assume that the value of the levered cash flow is lower than the sum of the value of the unlevered cash flow and the value of the tax shield. Again, it is shown that the inequality cannot hold because arbitrage opportunities exist. The equality only holds if the discount rate for the tax shield is rho, the return to unlevered equity. Using an iterative process, the argument can be extended period by period backwards to period zero. In conclusion, in the N-period case, the appropriate discount rate for the tax shield is rho, the return to unlevered equity.

The Pennsylvania State University, in compliance with federal and state laws and regulations governing affirmative action and nondiscrimination, does not discriminate in the recruitment, admission, and employment of students, faculty, and staff in the operation of any of its educational programs and activities as defined by law. Accordingly, nothing in this publication should be viewed as directly or indirectly expresing any limitation, specification, or discrimination as to race, religion, color, or national origin; or to handicap, age, sex, or status as a disabled or Vietnam-era veteran, except as provided by law. Inquiries concerning this policy may be directed to the Affirmative Action Officer or to the Vice President for Student Affairs.

Za kakovostno ravnanje z gozdovi potrebujemo zanesljive podatke o stanju in trendih razvoia gozdnih sestojev. Zbirarye podatkov je naldralja taza gozdarskega informacijskega sistema, zato mora biti posebna pozornost posvedena izbiri vrste, obsega in zahtevane kakovosti podatkov. Kljudne besede; gozdna inventun, kakovost podatkov, vzoftenje Abstnct Reliable data on the state and trends of the development of forest stands are needed for high-quality forest management. Data gathering is the most expensive phase of a forestry information system, therefore special attention must be paid to the selection of the kind, scope and to the quality of data.

This study uses out-of-sample equity value estimates to determine whether earnings disaggregation, imposing valuation model linear information (LIM) structure, and separate industry estimation of valuation model parameters aid in predicting contemporaneous equity values. We consider three levels of earnings disaggregation: aggregate earnings, cash flow and total accruals, and cash flow and four major components of accruals. For pooled estimations, imposing the LIM structure results in significantly smaller prediction errors; for by-industry estimations, it does not. However, by-industry prediction errors are substantially smaller, suggesting the by-industry estimations are better specified. Mean squared and absolute prediction errors are smallest when disaggregating earnings into cash flow and major accrual components; median prediction errors are smallest when disaggregating earnings into cash flow and total accruals. These findings suggest that (1) If concern is with errors in the tails of the equity value prediction error distribution, then earnings should be disaggregated into cash flow and the major accrual components; otherwise earnings should be disaggregated only into cash flow and total accruals. (2) Imposing the LIM structure neither increases nor decreases prediction errors, which provides support to the efficacy of drawing inferences from valuation equations based on residual income models that do not impose the structure implied by the model. (3) Valuation of abnormal earnings, accruals, accrual components, equity book value, and other information varies significantly across industries.

We use a residual income valuation framework to compare equity valuation implications of four approaches to employee stock options (ESOs) accounting: APB 25 ''recognize nothing'', SFAS 123 (revised) ''recognize ESO expense'', FASB Exposure Draft ''recognize and expense ESO asset'' and ''recognize ESO asset and liability''. Theoretical analysis shows only grant date recognition of an asset and liability, and subsequent marking-to-market of the liability, results in accounting numbers that capture the dilution effects of ESOs on current shareholder value. Out-of-sample equity market value prediction tests and in-sample comparisons of model explanatory power also support the ''recognize ESO asset and liability'' method.

This paper presents a new way of measuring residual income, originally introduced by Magni (2000a, 2000b, 2000c, 2001a, 2001b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors. The lost capital may be viewed as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost-capital residual income with the classical standard paradigm; many appealing properties are derived, among which a property of earnings aggregation. Different concepts and results, provided by different authors in such different fields as economic theory, management accounting and corporate finance, are considered: O'Hanlon and Peasnell's (2002) unrecovered capital and Excess Value Created; Ohlson's (2005) Abnormal Earnings Growth; O'Byrne's (1997) EVA improvement; Miller and Modigliani's (1961) investment opportunities approach to valuation; Keynes's (1936) user cost; Drukarczyk and Schueler's (2000) Net Economic Income, Fernández's (2002) Created Shareholder Value, Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, incentive compensation, capital budgeting decision-making.

This study examines the role of information asymmetry in the choice between rights issue and private equity placement from an important emerging market-India. In the post IPO scenario, Indian firms issue equity mainly through private placements as well as rights issues and followon public offers are negligible. We argue that problems associated with information asymmetry trickles down to all levels of equity issues. The outcome of this empirical exercise shows only those firms facing lesser information problems choose rights issue of equity. Private placements are chosen by firms facing higher information problems to circumvent information costs. The results remain invariant even after segregating the qualified institutional placements from private equity placement as the firms with information disadvantage choose to place equity privately.

The work of Ohlson (1995) and Feltham and Ohlson (1995) had a profound impact on accounting research in the 1990's. In this paper, we first discuss this valuation framework, identify its key features, and put it in the context of prior valuation models. We then review the numerous empirical studies that are based on these models. We find that most of these studies apply a residual income valuation model, without the information dynamics that are the key feature of the Feltham and Ohlson framework. We find that few studies have adequately evaluated the empirical validity of this framework. Moreover, the limited evidence on the validity of this valuation approach is mixed. We conclude that there are many opportunities to refine the theoretical framework and to test its empirical validity. Consequently, the praise many empiricists have given the models is premature.

Estudo dos diferentes apectos (urbanos, ambientais e de vida cotidiana) dos construtos socioespaciais, que são os hábitats enclausurados, a partir da análise de sua proliferação em Serra: um Município da Região Metropolitana de Vitória-Espírito Santo, Brasil. Exposição inicial dum panorama geral acerca dos condomínios fechados implantados nesse município, partindo-se da análise de suas tipologias e das estratégias de expansão da mancha urbana, associadas a esses empreendimentos. Realização de três estudos de casos em que consistem três distintos tipos de condomínios existentes, cujas temporalidades e espacialidades são díspares e podem traduzir sinteticamente as problemáticas associadas a esse tipo de expansão do/no espaço urbano. Palavras-chave: Autossegregação. Condomínios fechados. Região Metropolitana da Grande Vitória. RÉSUMÉ Analyse des différents aspects (urbains, environnementaux et la vie quotidienne) des « résidences surveillées » dans la région métropolitaine de Vitória, état de l'Espírito Santo au Brésil. Exposition d'un tableau de ces ensembles dans la municipalité de Serra (Région Métropolitaine de Vitória). L'établissement d'une typologie de ces habitats et l'étalement urbain qui leur est associé. Réalisation de trois études de cas de ces différents ensembles dans la municipalité de Serra, ceux-ci ont des temporalités et spatialités hétérogènes qui représentent les différentes sortes des problèmes liés à ce type d'habitat. Mots-clés : Ségrégation. Résidences surveillées. Région Métropolitaine de Vitória, Brésil

The present work has great importance for the economic and financial area due to the fact that targets the relevance of the financial indicators in anticipation of the stock variation. The aim is to measure the correlation, the type and intensity, between the variation of stock market profitability and the profitability of the securities traded by banks in Romania, listed on the BSE. The research is approached transversely (banks in Romania listed on the stock market) as well as longitudinally (from the date of listing on the Stock Exchange of each bank until 31.12.2016). Using the econometric model Eviews we tested the correlation between the profitability of BRD, BT, BCC bank`s securities and the profitability of Bucharest Stock Exchange, by BET and BET-C. The results show that the research hypothesis isn't validated for any of those banks.

We examine the valuation performance of a comprehensive list of value drivers and find that multiples derived from forward earnings explain stock prices remarkably well: pricing errors are within 15 percent of stock prices for about half our sample. In terms of relative performance, the following general rankings are observed consistently each year: forward earnings measures are followed by historical earnings measures, cash flow measures and book value of equity are tied for third, and sales performs the worst. Curiously, performance declines when we consider more complex measures of intrinsic value based on short‐cut residual income models. Contrary to the popular view that different industries have different “best” multiples, these overall rankings are observed consistently for almost all industries examined. Since we require analysts’ earnings and growth forecasts and positive values for all measures, our results may not be representative of the many firm‐years excluded from our...

Financial support from the PD Leake Trust (a charitable trust associated with the Institute of Chartered Accountants in England & Wales ['ICAEW']), with support from Deloitte and KPMG, is gratefully acknowledged for the research project into life assurance accounting of which this work forms a part. Grant applications are managed by the Centre for Business Performance ['CBP']. We are also grateful for the helpful comments of the members of the Academic Panel of the UK

The purpose of this study was to examine the effect of Economic Value Added (EVA), Market Value Added (MVA), Residual Income (RI), Earnings Per Share (EPS) and Operating Cash Flow (OCF) on Stock Returns. Samples used in the study were 22 of LQ-45 index companies listed on the Indonesia Stock Exchange. This study uses multiple linear regression analysis, with partial hypothesis test (t test), simultaneous test (f test), and coefficient of determination (adjusted R). The results of this research indicate that there is an influence from the variable influence of Economic Value Added (EVA), Market Value Added (MVA), Residual Income (RI), Earnings Per Share (EPS) and Operating Cash Flow (OCF) ) towards Stock Return. This is because the company is able to create good performance so that investors can invest in the company.

Historische Aspekte der forstlichen Planung lassen sich am besten am Beispiel der Nutzungsplanung darstellen. Aufgrund der Nutzungsanspruche war eine funktionale Dreiteilung weit verbreitet: Schlagweise genutzte Walder fur die Versorgung mit Brenn- und Werkholz in unmittelbarer Nahe der Siedlungen, Weidewald in der weiteren Umgebung (Allmend), ubriger, z.T. wegen oder fehlenden technischen Voraussetzungen nicht nutzbarer Wald in der weiteren Umgebung. Einfachste Methode der Nutzungsplanung war die Flachenteilung bei kurzen Rotationszeiten (Niederwald), anspruchsvollere die Nutzungsplanung mit Flachen- und Massenfachwerken oder kombinierten Verfahren sowie mit den sogenannten Formelmethoden. Am Beispiel des Kantons Zurich wird die Entwicklung exemplarisch skizziert.

The paper examines whether auditors' identification with the organization or with the profession will influence the use of outcome knowledge when reviewing audits. In addition, the study examines whether the conflict between organizational identity and professional identity influences evaluators' use of outcome knowledge. The study participants consisted of 63 auditing experts in managerial ranks. Auditors completed an instrument containing randomized audit review scenarios developed to evaluate the effects of identification and outcome knowledge on decisions. Results showed that organizational identification can minimize the effect of outcome knowledge on decisions while professional identification results in an increase in biases.

The Revolution in Domestic Hotel Management Contracts The changing economic environment of the hotel industry has altered the traditional relationship of management company and owner. The results of those changes in relative bargaining strength are reflected in the provisions of contemporary American management contracts by James J. Eyster THE MANAGEMENT CONTRACT has been a cornerstone of the hotel lndustry's rapid development of the past 20 years From ~ts reception, the concept of separating ownership from operation provided the opportunity for much-needed capital to fund the demand for new construction m the domestic and © 1993, Cornell Umverslty world markets during the 1970s and 1980s, while creating a vehicle for hotel-management compames to expand their networks and market shares Contracts negotiated dunng this period of rapid expansion specifically delineated operator nghts and responslblhtles as separate from those of the owner, providing the operator the freedom to operate the hotel without interference or significant input from the owner The hotel owner and the lender were passive partms to the deal The financial and operating projections for these arrangements supported this concept This was a period of almost unbroken eco

In 2005, the SEC enacted the Securities Offering Reform (Reform), which relaxes 'gun jumping' restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these pre-offering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi-exogenous changes in voluntary disclosure on information asymmetry, and thus a firm's cost of capital.

In the last years, Spanish firms have attempted to create value for their shareholders.The market value added (MVA) has been proposed by the Stern Stewart Consulting Group asa measure of value creation, and the economic value added (EVA) as an operating measure toimplement this new management philosophy. In this paper, an empirical analysis about therelationship between MVA and several performance

V slovenskem gozdno-lesnem gospodarstvu je primarni cilj ustvarjanje vrednosti in dobava želenih izdelkov kupcem oz. uporabnikom, kjer se učinki v celotni gozdno-lesni verigi vrednosti multiplicirajo z delovanjem vseh njenih členov. Uspešnost delovanja celotne verige vrednosti je pomembno razumeti z vidika potenciala dosegljivih količin, stopnje tehnološke predelave in mejne kakovosti vhodnih surovin ter lastnosti proizvedenih produktov. Cilj te študije je bil evidentiranje posameznih verig vrednosti v celotni domači gozdno-lesni verigi, analiza delovanja krožnosti in možnosti predelave listavcev v visokotehnološke izdelke in materiale, ki zagotavljajo visoko dodano vrednost. Identificirali smo pet primarnih verig vrednosti (P1…P5), dve verigi za zagotavljanje krožnosti (K6, K7), ter tri verige višjih predelovalnih stopenj za proizvodnjo izdelkov z višjo dodano vrednostjo (S8…S10). Pri predelavi lesa listavcev je pereče nedelovanje primarne verige »Furnir« (P2) ter omejeno delovanje...

2021 Neves et al. Este é um artigo de acesso aberto distribuído sob os termos da Licença Creative Commons BY-NC-SA 4.0, que permite uso, distribuição e reprodução para fins não comercias, com a citação dos autores e da fonte original e sob a mesma licença.

The quality of earnings is a summary metric in firm performance evaluation and a focal question to assess the quality of accounting information. A high-quality earnings figure will reflect a firm's current operating performance, being a good indicator of future operating performance; it also accurately annuitizes the intrinsic value of the firm. The multidimensional nature of the earnings quality (EQ) concept has given form to a multiplicity of constructs and measures. This chapter offers a systematic literature review on EQ and its implication on firm value. On the one hand, it discusses the different existent definitions of EQ and the multidimensional nature of the concept; on the other hand, it highlights a “new” EQ perspective taking into account the virtuosities of the residual income model. An empirical model is proposed that reinterprets rebuilding the linear information dynamics in relation to market value added and captures, in a composite measure, the three-dimensional...

The purpose of this article is to examine the academic literature about the function, structure, calculation, and weaknesses of economic value added (EVA). EVA has been used as a measure of economic profit and captures the inadequacies of using traditional rates of return. In addition, this article tackles the main residual earnings (RI) modifications used to calculate EVA. A keyword search for publications was conducted in early 2022. This study couples an inferential analysis with descriptive analyses of the existing research. The articles were sorted into different clusters based on bibliographic coupling analysis. This study identifies the main areas and current dynamics of EVA research while evaluating the quality and impact of the scientific output. Three broad themes emerged from the analysis of the cluster related to the use and application of EVA: residual income and valuation, financial performance, and performance management. In doing so, we hope to enhance the understand...

We investigate the conditions under which the accounting-based acquisition goodwill represents an economic asset. Analysis of the stock market reaction to 2123 acquisitions suggests that although investors perceive 41% of the acquisitions to have a negative net present value consistent with overpayment for the target, the acquirer records positive accounting goodwill. Adjusting the goodwill to eliminate any overpayment results in a better prediction of future operating performance. As a thought experiment, we also increase the recognized accounting goodwill for the remaining 59% of the sample. Again, we show that this goodwill construct is a better predictor of future operating performance.

In this study, we focused on the factors that affect the dividend policy and opinions on dividend policy of firms. The regression analysis is applied to ISE 30 Index firms in Turkey. We measured the influence of dividend payment and internal financing on a firm value. Data are used between 1987-2006. In Turkey, since dividend payments are made annually, a few data between 13 and 19 are used. In this study, only 5 firms' resulst are statistically significant. Accordingly, internal financing and firm value have a positively meaningful correlation. However, dividend payments have not such a clear meaning. While dividend payments of some firms have positive influence on firm value, some have negative influence. Consequently, this position supports puzzle on dividend payments and contrary theoretical opinions.

This paper extends the residual income literature to provide a framework for the use of residual income in performance measurement, applicable in value-based management. It shows that, under a simple initializing assumption, an accounting-free measure of 'excess value created' over a multi-period interval can be written entirely in terms of (i) within-interval realized residual incomes and (ii) end-of-interval expected future residual incomes, both appropriately adjusted for the time value of money. It also shows that, when the simple initializing assumption is relaxed, excess value created can be expressed in terms of 'excess residual incomes,' measured by comparison with expectations as at the beginning of the multiperiod interval.

Institute of Chartered Accountants in England & Wales ['ICAEW']), with support from Deloitte and KPMG, is gratefully acknowledged for the research project into life assurance accounting of which this work forms a part. Grant applications are managed by the Centre for Business Performance ['CBP']. We are also grateful for the helpful comments of the members of the Academic Panel of the UK

Financial support from the PD Leake Trust (a charitable trust associated with the Institute of Chartered Accountants in England & Wales ['ICAEW']), with support from Deloitte and KPMG, is gratefully acknowledged for the research project into life assurance accounting of which this work forms a part. Grant applications are managed by the Centre for Business Performance ['CBP']. We are also grateful for the helpful comments of the members of the Academic Panel of the UK Accounting Standards Board ['ASB'] at their October 2002 meeting; of participants in the ACCA Seminar on Liabilities: their recognition and measurement,

We examine the performance of 84 firms that adopt value-based management (VBM) systems during the period 1984-1997. The typical firm significantly improves matched-firm-adjusted residual income after adopting VBM. This improvement persists for the five post-adoption years studied. After controlling for possible sample bias, we find that large firms show less improvement than small firms. We find a negative relation between tying compensation to VBM and post-adoption performance. We also find that firms reduce capital expenditures following VBM adoption, but that the reductions in spending do not differ based on the firms' growth opportunities. Overall, the evidence suggests that VBM improves economic performance and the efficient use of capital.

This article develops and empirically implements a stock v aluation model. The model makes three assumptions: (i) dividend equals a xed fraction of net earnings-per-share plus noise, (ii) the economy's pricing kernel is consistent with the Vasicek term structure of interest rates, and (iii) the expected earnings growth rate follows a mean-reverting stochastic process. Our parameterization of the earnings process distinguishes long-run earnings growth from current growth and separately measures the characteristics of the rm's business cycle. The resulting stock v aluation formula has three variables as input: net earnings-per-share, expected earnings growth, and interest rate. Using a sample of individual stocks, our empirical exercise leads to the following conclusions: (1) the derived valuation formula produces signicantly lower pricing errors than existing models, both in-and out-of-sample; (2) modeling earnings growth dynamics properly is the most crucial for achieving better performance, while modeling the discounting dynamics properly also makes a signicant dierence; (3) our model's pricing errors are highly persistent o v er time and correlated across stocks, suggesting the existence of factors that are important in the market's valuation but missing from our model. In addition to pricing stocks, we can apply the model to back out market expectations about the rm's future from its stock price, allowing us to recover the relevant information embedded in the stock price.

Empirical accounting research provides surprisingly little evidence on whether accounting earnings numbers capture cross-sectional differences in risk that are associated with cross-sectional differences in share prices. We address two questions regarding the risk-relevance of accounting numbers: (1) Are accounting-related risk measures (i.e., the systematic risk and total volatility in a firm's time-series of residual return on equity) associated with the market's assessment and pricing of equity risk? (2) If so, then are these accounting-related risk measures incrementally associated with the market's assessment and pricing of equity risk beyond other observable factors, such as those in the Fama and French (1992) three-factor model? We develop an accounting-fundamentals-based measure of the market's pricing of risk-the difference between actual share price and a residual income valuation model estimate of share value using risk-free rates of return. Our results show that both systematic risk and total volatility in residual return on equity partially explain this pricing differential, and that the explanatory power of total volatility is incremental to the Fama and French (1992) factors-market beta, firm size, and the market-to-book ratio.

The Financial Accounting Standards Committee of the American Accounting Association (hereinafter, the Committee) is charged with responding to requests for input from standard setters on issues related to financial reporting. The Committee is pleased to respond to the invitation to comment on the Special Report of the G4+1 (hereinafter, the "Group"), "Reporting Financial Performance: A Proposed Approach" (hereinafter, the "special report"). The comments in this letter are based in part on the Committee's review of academic research. The opinions reflect the views of the individuals on the committee and not those of the American Accounting Association.

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