Earnings: concepts versus reported

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dc.contributor.author Grambovas, Christos
dc.contributor.author García-Lara, Juan M.
dc.contributor.author Ohlson, James
dc.contributor.author Walker, Martin
dc.date.accessioned 2022-06-30T09:46:10Z
dc.date.available 2022-06-30T09:46:10Z
dc.date.issued 2017-11-06
dc.identifier.bibliographicCitation Grambovas, C. A., Garcia Lara, J. M., Ohlson, J., & Walker, M. (2017). Earnings: Concepts versus Reported. Journal of Law, Finance, and Accounting, 2(2), 347–384.
dc.identifier.issn 2380-5005
dc.identifier.uri http://hdl.handle.net/10016/35350
dc.description.abstract The paper examines three benchmark earnings concepts: (i) permanentearnings with the cost-of-equity determining the capitalization, (ii) permanent earnings with the risk-free rate determining the capitalization, and (iii) economic earnings (Hicks; concept). The concepts can be measured empirically using stock prices. The study explains how the three concepts differ in terms of reflecting risk and growth. Critically, (i) and (ii) highlight two cases along a continuum. Case (i) renders growth irrelevant so that risk alone, as reflected by the cost-of-equity, determines the E/P yield ratio. By contrast, for (ii) the risk-free rate determines the E/P ratio because growth cancels out risk. The case is referred to as full cancelling out, FCO for short. The empirical part of the paper compares the earnings concepts to reported earnings using US data, for the period 1976-2015. These evaluations split firms into two categories, industrial and financial. Main findings show that for industrial firms, as an overall average, reported earnings relate closer to (ii) that is, FCO&-than to (i). Though the result is robust across methods, for distinct sub-periods (i) provides the better benchmark. As to reported earnings of financial firms, we hypothesize and find that reported earnings relate closer to (i) than (ii). This conclusion should be expected insofar financial firms rely on approximate fair value accounting, in which case earnings come close to economic earnings, (iii), and such earnings imply an average of (ii).
dc.format.extent 38
dc.language.iso eng
dc.publisher Now
dc.rights ©2017 C. A. Grambovas, J. M. Garcia Lara, J. Ohlson and M. Walker
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other Financial markets: market efficiency
dc.subject.other Financial statement analysis and equity valuation
dc.subject.other Financial reporting
dc.subject.other Market value and firm growth
dc.title Earnings: concepts versus reported
dc.type article
dc.subject.eciencia Economía
dc.identifier.doi https://doi.org/10.1561/108.00000018
dc.rights.accessRights openAccess
dc.type.version publishedVersion
dc.identifier.publicationfirstpage 347
dc.identifier.publicationissue 2
dc.identifier.publicationlastpage 384
dc.identifier.publicationtitle Journal of Law, Finance, and Accounting
dc.identifier.publicationvolume 2
dc.identifier.uxxi AR/0000021885
dc.affiliation.dpto UC3M. Departamento de Economía de la Empresa
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