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On the relevance of earnings components: valuation and forecasting links

Wang, P and Pope, P F (2000) On the relevance of earnings components: valuation and forecasting links. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    In this paper we analyze the links between the informational relevance of earnings components for valuation and for forecasting abnormal earnings. We show that forecasting irrelevance implies valuation irrelevance. However, except in the case where aggregate earnings is the sufficient earnings construct for valuation and forecasting, valuation irrelevance does not imply forecasting irrelevance. Additionally, we show that to be irrelevant for valuation and forecasting, an earnings component need not be unpredictable. Our analysis has implications for the design and interpretation of empirical tests of informational relevance. It also has potential implications for practical investment analysis. Generally, value estimates based on aggregate earnings are expected to be less precise than value estimates based on knowledge of earnings components and their relation to other accounting items.

    Item Type: Monograph (Working Paper)
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48597
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:01
    Refereed?: No
    Published?: Published
    Last Modified: 27 Jul 2012 01:10
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48597

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