Review and Comments on Accrual Accounting Valuation Models.

• In Event: GAAP, Accounting Numbers, and Stock Returns

Abstract

This paper reviews two models of firm valuation: the book value growth model and abnormal earnings growth model. We illustrate how each of these accrual accounting valuation models outperforms the traditional dividend discount model in terms of their accuracy in estimating the future value of a firm within a 3 -5 year forecast horizon. Responding to the concern about the effect of earnings management the accrual accounting valuation models, we suggest adding the variable growth in employees to the model to represent the true growth of the firm. To improve the models, we suggest ways that future research can address concerns about the clean surplus relation and the arbitrary selection of the discount factor used in the models.

Authors

• Min Liu, Brooklyn College

• Rupert Rhodd, Florida Atlantic University