A recent paper by Ohlson and Juettner-Nauroth (2005) 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.
This paper investigates the validity and usefulness of “hybrid” valuation models. We recast the model in Ohlson and Johannesson (2016) as a hybrid of the Dividend Discount Model and an earnings-based price multiple model, and develop a new hybrid model that generalizes the Residual Income Valuation Model. After validating the theoretical properties of these models' unique parameters, we assess the usefulness of the hybrid models in two applications. In application one, we find that intrinsic values from the hybrid models are more accurate than those from common discounted models or price multiple models. These improvements are attributable to the hybrid models' ability to incorporate stock price and more realistic assumptions about growth. In application two, we find that the implied cost of equity from the hybrid models better captures systematic risks and key idiosyncratic risks, and captures expected returns. These results demonstrate the validity and usefulness of hybrid valuation models.
JEL Classifications: G12; G14; G17; G31; M41.
Data Availability: The data used are publicly available from the sources cited in the text.
In a neo-classical setting of equity-valuation, this paper develops a principle of dividend policy irrelevancy (DPI) to identify and exploit characteristics of earnings. The latter refers to the idea that a value-relevant variable can not reasonably be labeled "earnings" unless it satisfies certain analytical properties with intuitive appeal. The paper proceeds in two parts. The first part, which culminates in Proposition I, provides necessary and sufficient conditions for DPI. The second part concerns how DPI predicates constructs of earnings and their analytical properties. A key result, Proposition II, shows that one can use the analytical properties of earnings to deduce the core approach in practical equity-valuation, namely, measures of growth in expected earnings explain the price to forward-earnings ratio.
Abstract
We investigate the key contractual features of CEO performance-vested (p-v) equity compensation. We hypothesize that contractual features such as relative performance evaluation (RPE), the performance period length, and the number of performance metrics can be configured to improve the informativeness of performance metrics. Consistent with the hypotheses, we find that firms using market metrics are more likely to adopt RPE and long performance periods than firms using accounting metrics. The effects of performance metrics on RPE and performance periods remain prominent after we allow these features to be jointly determined. Moreover, we find that RPE is positively associated with longer performance periods, suggesting that the two features complement each other in improving the informativeness of performance metrics in p-v equity compensation. Our findings not only reveal the intricate relations between the contractual features, but also provide empirical support for the voting guidelines by proxy advisory services and have implications for the evolving practice of executive compensation.
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