Earnings, cash flows, and ex post intrinsic value of equity

Journal Article (Journal Article)

We reexamine the relative importance of earnings and operating cash flows in equity valuation. In contrast to previous studies that use stock returns (Dechow 1994) or future operating cash flows (Barth et al. 2001), we use ex post intrinsic value of equity as the criterion for comparison. We determine ex post intrinsic value of equity by discounting future dividends over a three-year horizon and market price at the end of the horizon by industry cost of equity. The advantage of the ex post intrinsic value measure over stock returns is that it is not contaminated by the stock market's fixation on reported earnings (Sloan 1996). Also, unlike finite horizon future operating cash flows, ex post intrinsic values better reflect the magnitude, timing, and uncertainty of investors' future cash flows (SFAC No. 1, FASB 1978). Our results suggest that accrual-based earnings dominate operating cash flows as a summary indicator of ex post intrinsic value.

Full Text

Duke Authors

Cited Authors

  • Subramanyam, KR; Venkatachalam, M

Published Date

  • March 1, 2007

Published In

Volume / Issue

  • 82 / 2

Start / End Page

  • 457 - 481

International Standard Serial Number (ISSN)

  • 0001-4826

Digital Object Identifier (DOI)

  • 10.2308/accr.2007.82.2.457

Citation Source

  • Scopus