Earnings, Earnings Growth and Value
Earnings, Earnings Growth and Value presents a model of earnings and dividends leading up to the core principle that growth in earnings explains the price to forward-earnings ratio. This model is referred to as the OJ (Ohlson and Jeuttner-Nauroth) model. The OJ model takes into account two growth measures of earnings -- the near term and the long term -- to explain the price to forward-earnings ratio. Further, the model allows for a broad set of dividend policies. Earnings, Earnings Growth and Value starts from the basics and derives the valuation formula which shows how value depends on earnings and their growth. Some of the topics developed here are include dividend policy irrelevancy (DPI), how one extends the model to incorporate an underlying information dynamic, accounting rules and their influence on the model, and ways in which the model can be extended to reflect operating vs. financial activities. Earnings, Earnings Growth and Value should be required reading for researchers in accounting and finance with an interest in accounting theory, equity valuation and financial accounting.
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Basics of the OJ Model
The OJ Model and Dividend Policy Irrelevancy
The Labeling of xt as Expected Earnings
Capitalized Expected Earnings as
Accounting Rules and the OJ Formula
Operating Versus Financial Activities
The generalization of Lemma 4 1
accounting rules aﬀect analysis Assume PVED assumptions asymptotic growth beneﬁts book value cash accounting Constant Growth model cost of equity deﬁne depend diﬀerent discount factor dt/xt dt+1 earnings due eﬀect equals equation equity capital equity valuation expected dividends expected earnings explain the price Feltham ﬁnancial activities ﬁnancial assets ﬁrm ﬁrm’s ﬁrst forecasts forward-earnings ratio free cash ﬂows GAAP growth in earnings growth in expected horizon identiﬁes implies increases inﬂuence information dynamics investment practice Lemma limt M/B model near-term growth Ohlson OJ dynamic OJ formula OJ model OJ valuation formula operating activities operating earnings P/E ratio payout ratio present value price to forward-earnings Proposition 3.1 r(xt R−txt reﬂects regularity condition reverse engineering roe1 satisﬁes savings account sequence setup Speciﬁcally suﬃcient superior earnings growth terminal value textbooks transversality condition TrErrT underlying dynamic valuation models xat+1 xt+1 zt+1