Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

NOTES

1. See “Varied Profit Reports by Firms Create Confusion” (1999).

2. Brown and Sivakumar (2001); Bradshaw and Sloan (2002); Francis, Schipper, and Vincent (2001); Lougee and Marquardt (2001).

3. See also Bernard (1995).

4. Although some authors, including Bernard and Frankel and Lee (1999), have interpreted the Ohlson model as an empirical model, it is more appropriately interpreted as a transformation of the dividend discount model. So, in empirical implementations, there are two explanations for a less-than-perfect fit of model values to market prices. One is that approximations to the market discount rate and the market’s cash flow expectations used by researchers contain measurement error. The second is that market prices may not be rational, so the PV relationship, in any form, fails to describe the manner in which stocks are valued. For this chapter, we have assumed that the market is rational. Thus, we interpret the PV relationship, given the expectations and the discount rate that it incorporates, as an identity.

5. Beaver (1998) made a similar point about earnings and market value in complete markets. That is, earnings measurement is redundant once market values are known.

6. Moreover, computational feasibility is unlikely to be a compelling issue for analysts with state-of-the-art computers and real-time access to financial statement information for the universe of publicly traded companies.

7. We do not mean to say that accounting adjustments are divorced from economic ...