Residual income valuation models and inflation

Ashton, David J. and Peasnell, Ken V. and Wang, Pegguo (2011) Residual income valuation models and inflation. European Accounting Review, 20 (3). pp. 459-483. ISSN 0963-8180

[img]
Preview
PDF (Residual income valuation models and inflation)
10.pdf - Submitted Version

Download (193kB)

Abstract

Existing empirical evidence suggests that residual income valuation models based on historical cost accounting considerably underestimate equity values. One possible explanation is the use of historical cost accounting under inflationary conditions. In this paper, we use a residual income framework to explore theoretically how historical cost accounting numbers need to be adjusted for inflation in forecasting and valuation. We demonstrate that even in a simple setting where inflation is running at a relatively low level, residual income models are likely to produce severe under-valuations if inflation is not properly taken into account. We use simulated data to reinforce our theoretical findings and to illustrate the difficulties that empirical investigators face working within the confines imposed by real data.

Item Type:
Journal Article
Journal or Publication Title:
European Accounting Review
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/aacsb/disciplinebasedresearch
Subjects:
ID Code:
45609
Deposited By:
Deposited On:
11 Jul 2011 18:35
Refereed?:
Yes
Published?:
Published
Last Modified:
09 Aug 2020 01:34