Valuation: Accounting for Risk and the Expected Return

Abstract

Under accounting principles, the recognition of earnings is path-dependent and the path depends on risk and its resolution: under the so-called realization principle, earnings are not booked until uncertainty is resolved. In asset pricing terms, the principle means that earnings cannot be recognized until the firm can book a low-beta asset such as cash or a near-cash discounted receivable. If the risk to which this accounting responds is priced risk, the accounting indicates the expected return. This paper connects accounting under this principle to risk and return, summarizes the supporting empirical evidence, and examines the implications for research on the implied cost of capital, cash-flow betas, asset pricing models that imbed accounting numbers, and papers that assume an autoregressive model for the earnings path to infer the expected return. The accounting that captures risk and its resolution also has implications for the unsolved issue of specifying the appropriate accounting for accountingbased valuation models and, indeed, for financial accounting standards.

Social comparison of cost behaviour and financial analysts

“…SG&A spending is essential to produce long-term value for a firm by enhancing brand reputation and operating efficiency. Penman (2016) argues that SG&A expenditures, such as R&D, promotions, employee training and retention, branding and supply chain development, are expensing investments with uncertain revenues. Optimal levels of relative SG&A are hard to assess.…”

The response of Australian firms to AASB 138 disallowing the recognition of internally generated identifiable intangibles

“…The reduced flexibility in the regulations is reflective of internally generated intangibles being intrinsically more difficult to measure, and the idea that the ability to recognise such assets in financial statements could produce opportunistic reporting behaviour. See also the perspective of Penman (2016) with respect to the role of accounting (in fully expensing investments in intangibles) as informing the market on risk and expected return of such investments. Although Wyatt (2005) shows that in Australia, the recognition of such intangibles is associated with firms' underlying economics, other studies find that opportunistic incentives do motivate managers to recognise intangibles (e.g., Ely & Waymire, 1999; Gerhardy & Wyatt, 2001; Jones, 2011; Kallapur & Kwan, 2004; Muller, 1999; Russell, 2017).…”

A Falácia Do Paradoxo: Uma Análise Do Binômio Risco-Retorno No Mercado De Capitais Brasileiro

“…Além disso, a despeito das evidências de que as informações contábeis são úteis para a precificação de ativos (Penman, 2011;Penman & Zhu, 2014), é necessário levar em conta que os dados contábeis são mensurados a partir de parâmetros normativos que restringem o reconhecimento de incertezas nas demonstrações financeiras. Portanto, sua capacidade preditiva será maior quando ajustadas pelo risco relacionado aos fluxos de caixa futuro da firma (Werneck et al, 2010;Konchitchki et al, 2016;Penman, 2016). Complementarmente, fatores ambientais, como a distribuição dos retornos das firmas em relação ao setor (Henkel, 2009) ou incertezas econômicas, políticas, sociais e normativas dificultam a preditividade dos retornos futuros, o que indica que as relações observadas ex-post podem não se confirmar, conforme observado (Becerra & Markarian, 2021;Campos et al, 2014;Mikosz et al, 2020;Muñoz et al, 2020).…”

“…Para Penman (2016), o lucro (prejuízo) apresentado nas demonstrações financeiras é um dado útil para a avaliação e a precificação de ativos. A esse respeito, Johnstone (2021) aponta que, no processo de precificação de ativos, aqueles investidores que conseguirem realizar estimações de retorno esperado mais precisas tendem a obter uma relação risco/retorno mais consistente.…”