Constraints on Accrual Components of Earnings in Equity Valuation
50 Pages Posted: 9 Aug 2002
Date Written: June 2002
Abstract
In this study, we extend the findings of Barth, Beaver, Hand, and Landsman (1999) by providing empirical evidence that for three levels of disaggregated earnings, (1) the structure provided by the Feltham-Ohlson model aids in predicting equity market values, and (2) forecasting of equity market values based on firms partitioned into industry groupings is superior to constraining all firms to have the same model parameters. We also find that disaggregating earnings into cash flows and total accruals generally yields better forecasts of equity market values. However, the efficacy of further disaggregation of total accruals into its primary components for forecasting equity market values appears to be industry-specific.
JEL Classification: G12, M41
Suggested Citation: Suggested Citation
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