The Value Relevance of Dividends, Book Value and EarningsThis paper compares the value relevance of book value and dividends versus book value and reported earnings. Our work is motivated by recent research including Ohlson (1995), Feltham andOhlson (1995), Bernard (1995), Burgstahler and Dichev (1997), Collins, Maydew and Weiss (1997), Barth, Beaver and Landsman (1998) and Hand and Landsman (1999).We justify modeling price in terms of book value and dividends in two ways. First, using Modigliani and Miller's (1959) argument, dividends may have a stronger correlation with permanent earnings than reported earnings. Second, we derive a model of price in terms of book value and dividends from basic analytical relationships.Three sets of findings are reported. First, overall, the variables, book value and dividends, have almost the same explanatory power as book value and reported earnings. Second, for firms with transitory earnings, dividends have greater explanatory power than earnings but book value and earnings have about the same explanatory power as book value and dividends.Most important, when earnings are transitory and book value is a poor indicator of value, dividends have the greatest explanatory power of the three variables. The value relevance of dividends is confirmed further in statistical tests using holdout samples.

A recent paper by Luckett (1984,) reviewed the 25 or so years of writing on the problem of using the accounting rate of return (ARR) to estimate the internal rate of return (IRR). His conclusions were 'not heartening for researchers' (p. 229). All of the estimation methods discussed to date, with one possible exception, have important practical limitations.The exception is a method, first devised by Ijiri (1978) and then elaborated on by Salamon (1982), which derives the estimate of the IRR from the cash recovery rate (CRR) and other information about the firm. Although Luckett did not actually analyze this method in his survey, he commented that this new approach to the problem (hereafter, the CRR method) 'potentially brings some hope '(p. 229).This conjecture about the potential of the CRR method, which at least partly reflects Salamon's optimistic conclusion (1982, p. 302), is too sanguine. The CRR method is based on a restrictive set of assumptions which limit its practical usefulness. The purpose of this note is to review these assumptions and their implications in order to explain the limitations of the CRR method. ASSUMPTIONS UNDERLYING THE CRR METHODThe CRR method (Salamon, 1982) is based on a model which has the same structure as one developed by Salamon in 1973. It assumes that a firm is a collection of projects that differ only in scale. Every project has the same life of n years, cash flow profile and IRR; and cash flows in any year during the life of a project are assumed to be related to cash flows in the first year by a cash flow profile parameter, 6.The initial project is acquired in year zero which is 'arbitrarily designated' (Salamon, 1973, p. 297). Since a constant growth rate of gross investment, g', and a constant growth rate of prices, p', are assumed, everything in the model is linked to the initial project, i.e., the project acquired in year zero.

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