The effects of constructive capitalisation on predicting cross-sectional stock returns: the residual income valuation approaches

Foo, Marcus S. (1998). The effects of constructive capitalisation on predicting cross-sectional stock returns: the residual income valuation approaches Honours Thesis, Department of Commerce, The University of Queensland.

       
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Author Foo, Marcus S.
Thesis Title The effects of constructive capitalisation on predicting cross-sectional stock returns: the residual income valuation approaches
School, Centre or Institute Department of Commerce
Institution The University of Queensland
Publication date 1998
Thesis type Honours Thesis
Total pages 1.
Language eng
Subjects 1502 Banking, Finance and Investment
Formatted abstract This study provides an empirical examination of the inherent limitations in the Edwards Bell- Ohlson (EBO) valuation model. As Imhoff (1998) explains, the intrinsic value estimated by the EBO model is subject to the effect of the missing assets problem commonly found in accounting numbers. The paper examines the missing assets problem within the context of pre-discovery costs written-off in the Australian mining industry. The results indicate that (1) pre-discovery costs written-off are value relevant, and (2) EBO's intrinsic value measure fails to properly account for this variable. This paper attempts to remedy this problem by applying a multiple-period capitalisation technique to correct for the 'missing assets errors' in accounting numbers. The empirical evidence presented in this paper suggests that the predictive power of the EBO model is improved when it is applied in conjunction with this adjustment process. This effect is not the product of systematic risk.

 
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