Splitting up value: A critical review of residual income theories

Magni, Carlo Alberto

doi:10.1016/j.ejor.2008.09.018

Cited by 59 publications

(28 citation statements)

References 142 publications

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“…The above recursive equation is a fundamental relation in economics, finance, and accounting (see Magni 2009aMagni ,b, 2010b (Weingartner 1966). We now show that, by interpreting the -period project as a portfolio of one-period assets, we may apply Proposition 12 and get the project's rate of return.…”

Section: Proposition 11mentioning

confidence: 99%

“…Harcourt 1965, Solomon 1966, Livingstone and Salamon 1970, Gordon 1974, Kay 1976, Fisher and McGowan 1983, Luckett 1984, Salamon 1985, Kay and Mayer 1986, Gordon and Stark 1989, Whittington 1988, Feenstra and Wang 2000, Stark 2004. See also Magni 2009a, 2011c, Magni and Peasnell 2012, 2015.…”

Section: The Average Return On Asset (Aroa)mentioning

confidence: 99%

“…Then, Definition 4 is fulfilled, with = and = . ∎ 14 12 See also Pasqual et al (2013), Magni (2009a) and references therein. 13 It is evident, from (7), that Hazen's (2003) approach is NPV-consistent, by picking = for some and = ∑ −1 =1 ( ) .…”

Section: Proposition 14mentioning

confidence: 99%

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Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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Abstract. This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project's cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project's capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.

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Section: Proposition 11mentioning

confidence: 99%

Section: The Average Return On Asset (Aroa)mentioning

confidence: 99%

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Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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“…This notion is implicitly subsumed in a value-based metric proposed by Drukarczyck and Schueler (2000) and has been anticipated by Pressacco and Stucchi (1997) in the final remarks of their paper. While the standard notion traces back to Marshall (1890), the new notion is naturally embraced in arbitrage theory and is enfolded in Keynes's (1936) notion of user cost (see Magni, 2009a). This paper aims at providing an axiomatization of residual income, showing that different axioms subsume the two definitions of residual income, and highlighting some interesting formal properties;…”

Section: Introductionmentioning

confidence: 99%

Axiomatization of residual income and generation of financial securities

Ricci

Magni

2012

Quantitative Finance

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This paper presents an axiomatization of residual income, aka excess profit, and illustrates how it may univocally engenders fixed-income or variable-income assets. In the first part it is shown that, depending on the relations between excess profit and the investor's excess wealth, a well-specified theory of residual income is generated: one is the standard theory, which historically traces back to Hamilton (1777) and Marshall (1890) and is a deep-rooted notion in economic theory, finance, and accounting. Another one is the systemic value added or lostcapital paradigm: introduced in Magni (2000Magni ( , 2003, the theory is enfolded in Keynes's (1936) notion of user cost and is naturally generated by an arbitrage-theory perspective. In the second part, the paper reverts the usual analysis: instead of computing residual incomes profits from a pattern of cash flows, residual incomes are fixed first to derive vectors of cash flows. It is shown that variable-or fixed-income assets may be constructed on the basis of either theory starting from pre-determined growth rates for excess profit. In particular, zero-coupon bonds and coupon bonds traded in a capital market are shown to be deducted as equilibrium vectors of residual-income-based assets.

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“…There are also other related works associated with market behavior. Magni (2009), for instance, performed a comprehensive investigation on capital budgeting decisions, sales and production and decisions, use of optimal portfolios, prediction of asset prices and estimation of intrinsic values. Magni (2010), in another assignment, performed an in depth investigation on residual income and value creation and proposed a new method for measuring residual income.…”

Section: Introductionmentioning

confidence: 99%

An investigation on relationship between residual income and internal and external performance measures

Daryani¹,

Serkani²

2012

msl

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During the past few years, there have been growing interest in learning the relationship between residual income and other financial figures such as dividend per share, market value and operating cash flow. The proposed study of this paper gathers the financial information of all listed firms traded in Tehran Stock Exchange over the period of 2007-2011. We only concentrate on listed companies whose fiscal years started from March to May of each year. The other criterion associated with the proposed study of this paper is that shares of the selected firms must have been active during period of study and there must be no change in their fiscal calendar. The study does not include the shares of holdings, banks, insurance firms. Finally, the information of the firms must be available for course of study. The study uses two regressions analysis and examines five hypotheses including the relationship between residual income and other factors including dividend per share, value added operating cash flow, value added cash flow, market cap and market value added. Using two regression models, all these hypotheses are investigated and the results of the survey confirm a meaningful relationship between residual income and dividend per share, value added operating cash flow, value added cash flow. However, the results of the second model do not confirm the last two hypotheses.

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Splitting up value: A critical review of residual income theories

Cited by 59 publications

References 142 publications

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Axiomatization of residual income and generation of financial securities

An investigation on relationship between residual income and internal and external performance measures

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