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Earnings, Earnings Growth and Value
Author(s): James Ohlson;Zhan Gao
Source:
Journal:Foundations and Trends® in Accounting
ISSN Print:1554-0642, ISSN Online:1554-0650
Publisher:Now Publishers
Volume 1 Number 1,
Document Type: Article
Pages: 70 (1-70)
DOI: 10.1561/1400000001
Abstract: A recent paper by \cite{OhJu2005}
develops a model in which a firm's expected earnings and their
growth determine its value. At least on its surface, the model
appeals because it embeds the core principle used in investment
practice and, further, generalizes the Constant Growth model
(Gordon and Williams) without restricting the firm's dividend
policy. This text reviews the valuation model and its properties.
It also extends previous results by analyzing a number of issues
not adequately covered in the original paper. These topics include
the precise nature of dividend policy irrelevancy, how the model
relates to other well-known valuation models, the role of
accounting principles, and how it can be developed on the basis of
an underlying information dynamics. A central result shows why the
model should be accorded “benchmark” status.
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