Residual earnings valuation with risk and stochastic interest rates

Article Abstract:

A generalized accounting-based valuation model was developed. This formula equates the market value of firm equity to book value added to the present value of expected abnormal earnings. Development of this version involved the generalization of present value of dividends formula and the assumption that accounting for future events satisfies the clean surplus relation. The model demonstrates how one shifts the formula for risk, responds to stochastic interest rates, determines the discount factors and quantifies the capital-charge aspect of abnormal earnings. Major finding reveals that no arbitrage in dividends is equivalent to no arbitrage in current book value and expected abnormal earnings, although accounting measures do not have a specific role. The insignificance of measurements is unexpected since the risk adjustments rely on how abnormal earnings correlate with economy-wide, risk-generating factors.

Methods, Analysis, Risk assessment, Interest rates, Valuation, Arbitrage, Earnings per share

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On optimal choice of inventory accounting method

Article Abstract:

The choice of an optimal inventory accounting method is influenced largely by stockholders' preferences and managers' incentives. These preferences are directly or indirectly reflected in stockholders' use of accounting rules. The tendency of stockholders' to exert their preferences and power over managers by utilizing accounting rules is motivated mainly by three factors: tax rate, the rate of real holding gain and acquisition price. Taxes are primarily responsible for the conflicting preferences of stockholders and managers. Such a divergence in preferences leads to operating distortions and tax gains through last in, first out (LIFO) that could affect cash flows. Hence, the choice of an optimal inventory accounting policy will rest on a strategy that combines first in (FIFO), first out with LIFO, although the use of either FIFO or LIFO could also lead to an optimal choice.

Accounting and auditing, Stockholders, Beliefs, opinions and attitudes, Inventory control

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A perspective on the use of limited-dependent and qualitative variables models in accounting research

Article Abstract:

This study conducts a review of the methodology of qualitative and limited-dependent variable aspects of accounting models and the applications of these models in accounting research. Among the models discussed are: logit and probit models and discriminant analysis, the tobit model and truncated regression model, the sample selection bias model, and the self-selectivity models. The limitations of the various models' usage are discussed along with suggestions for their improvement.

Usage, Discriminant analysis, Logits

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