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| Author: | Ashton, D. Peasnell, K. Wang, P. |
| Title: | Residual income valuation models and inflation |
| Journal: | European Accounting Review
2011 : VOL. 20:3, p. 459-483 |
| Index terms: | models incomes valuation inflation stocks cost accounting |
| Language: | eng |
| Abstract: | Empirical evidence suggests that residual income (henceforth as: res-income) valuation models based on historical cost accounting (herein as: c-accg.) markedly underestimate equity values. This paper utilizes a res-income framework to explore theoretically how historical c-accg. numbers need to be adjusted for inflation in forecasting and valuation. It is shown that even in a simple setting with inflation running on a relatively low level, res-income models presumably produce severe under-valuations if inflation is not soundly taken into account. Simulated data is used to reinforce the theoretical findings and to illustrate the difficulties faced by empirical investigators working within the limitations set by real data. |
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