On comparing cash flow and accrual accounting models for use in equity valuation: A response to Lundholm and O'Keefe (CAR, Summer, 2001)

Penman, Stephen H. (2001) On comparing cash flow and accrual accounting models for use in equity valuation: A response to Lundholm and O'Keefe (CAR, Summer, 2001). Contemporary Accounting Research, 18 4: 681-692.


Author Penman, Stephen H.
Title On comparing cash flow and accrual accounting models for use in equity valuation: A response to Lundholm and O'Keefe (CAR, Summer, 2001)
Journal name Contemporary Accounting Research   Check publisher's open access policy
ISSN 0823-9150
1911-3846
Publication date 2001-06
Sub-type Discussion - responses, round table/panel discussions, Q&A, reply
Volume 18
Issue 4
Start page 681
End page 692
Total pages 12
Place of publication Toronto, Ont., Canada
Publisher Canadian Academic Accounting Association
Language eng
Subject 1501 Accounting, Auditing and Accountability
150201 Finance
Abstract A claim is commonly made that cash flow and accrual accounting methods for valuing equities must always yield equivalent valuations. A recent paper by Lundholm and O'Keefe (2001), for example, claims that, because of this equivalence, there is nothing to be learned from empirical comparison of valuation models. So they dismiss recent research that has shown that accrual accounting residual income models and earnings capitalization models perform, over a range of conditions, better than cash flow or dividend discount models. This paper demonstrates, with examples, that the claim is misguided. Practice inevitably involves forecasting over finite, truncated horizons, and the accounting specified in a model - cash versus accrual accounting in particular - is pertinent to valuation with finite-horizon forecasting. Indeed, the issue of choosing a valuation model is an issue of specifying pro forma accounting, and so, for finite-horizon forecasts, one cannot be indifferent to the accounting.
Keyword Cash Flow
Stocks - price
Valuation
Corporate profits
Accrual basis accounting
Accounting methods
Q-Index Code CX
Q-Index Status Provisional Code
Institutional Status Unknown

Document type: Journal Article
Sub-type: Discussion - responses, round table/panel discussions, Q&A, reply
Collection: UQ Business School Publications
 
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Created: Wed, 26 Apr 2006, 22:13:56 EST