Analysts Earnings Forecasts and the Roles of Earnings and Book Value in Equity Valuation

Ou, Jane A.; Sepe, James F.

doi:10.1111/1468-5957.00433

Cited by 32 publications

(13 citation statements)

References 11 publications

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“…This risk adds uncertainty to the rent obtained by the connected firm and, accordingly, influences investors' evaluation of the firm's earnings persistence. For the above reasons and according to the noise-in-signal model developed by Holthausen and Verrecchia (1988) and Kothari (2001) that is empirically supported by Teoh and Wong (1993) and Ou and Sepe (2002), we predict that firms connected to political bureaucrats have a lower level of accounting informativeness than unconnected firms.…”

Section: Introductionsupporting

confidence: 72%

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Fan¹,

Ge²,

Li³

et al. 2014

Business Fin & Account

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The measurement difficulties arising from relationship‐based business transactions can result in accounting opacity. We test this hypothesis by exploiting a natural experiment. Using a sample of firms that were networked with 45 high‐level Chinese bureaucrats involved in corruption scandals between 1996 and 2007, we examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks. We predict that the costs and benefits of business‐politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm's economic performance. In turn, a break in a political relationship due to anti‐corruption enforcement reduces the measurement noise and improves the earnings informativeness. We find that, relative to the matched control firms, there is indeed a significant increase in the earnings informativeness of the networked firms following the public exposure of a scandal. Robustness tests fail to show that the documented improvement in the earnings informativeness is primarily due to systematic changes in the firms’ earnings management behavior or disclosure policies.

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Section: Introductionsupporting

confidence: 72%

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Fan¹,

Ge²,

Li³

et al. 2014

Business Fin & Account

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“…These analyses are based on panel data that are different to that applied in this paper, in which we use a cross section data sample. Similar to our results Ou and Sepe (2002) find that analysts' forecast-based measure of "earnings persistence" dominates historical earnings variance in explaining cross-sectional variations in the value-relevance of future earnings, and in this sense PER ratio. Arslan and Zaman (2014) also underline our results even in the presence of a panel data approach, indicating that their study reveals that the price earnings ratio has a significant positive impact on stock prices (market cap).…”

Section: Discussionsupporting

confidence: 88%

Drivers to equity valuation: Perpetuities or annuities approach? An application to the main European stock markets

Reis

Augusto

2019

JOB

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Academics and practitioners have been applying equity valuation methods mainly based on discount cash flow models, residual income models, or dividend discount models combined with balance sheet and income statement multiples of market comparables to analyse share price, provide price targets for investors, or even as a basis for transactions such as mergers and acquisitions (M&A). Most of these methods rely on mathematical deductions of growing or constant perpetuities or near perpetuities (such as annuities) to attain market values. However, it is of the utmost relevance for valuation to verify how the theoretical models relate with real values, and what their relationship is with companies' past age. Beyond stating a non-linear relationship for valuation models and ascertain important valuation drivers, using a sample of more than 3,400 European companies with cross section data, this paper contributes to the improvement of valuation model's effectiveness by inducing non-explicit period valuation modifications to long-term annuities and perpetuities, considering class age intervals. This paper's originality is supported by the study of the relationship of past company age with predicted annuities, the proof of non-compliance of perpetuity-based valuation models, and the contribution of new value drivers for valuation purposes.

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“…The identification of current earnings as the best value driver for the P/E ratio by the terms of accuracy agrees with the results of Ou and Sepe (2002) who imply that current earnings is perceived by market participants as a good value indicator.…”

Section: Multiples' Evaluation In Terms Of Accuracysupporting

confidence: 87%

The Accuracy of Multiples

Antonios¹,

Samaras²,

Panagiotis³

2011

American Journal of Applied Sciences

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Problem statement: Equity valuation with the use of multiples is widely used by academics and practitioners concerning its functionality. This study aims to explore the sensitivity of three multiples in terms of accuracy. Approach: Price-to-Sales (P/S) multiple, the price-to-book value of equity (P/B) multiple and the Price-to-Earnings (P/E) multiple are three multiples under consideration, using both current and one-year-ahead earnings forecasts. Results: Evidence of empirical results show that, the multiples P/mdfy1 and P/mnfy1 are effective in terms of accuracy, with their means being negatively biased and their medians being positively biased. Finally, current earnings are identified as more appropriate value driver for the calculation of the P/E ratio by terms of accuracy. The results can be considered as reliable owing to the large sample and the procedure followed for its selection. Conclusion: This study offers a better understanding of the valuation approach through the use of multiples, in order analysts assumption to be more carefully and properly chosen and their results to be more accurately produced.

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Analysts Earnings Forecasts and the Roles of Earnings and Book Value in Equity Valuation

Cited by 32 publications

References 11 publications

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Drivers to equity valuation: Perpetuities or annuities approach? An application to the main European stock markets

The Accuracy of Multiples

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