Abstract

http://ssrn.com/abstract=846546
 
 

References (42)



 
 

Citations (6)



 


 



Earnings Quality and the Equity Risk Premium: A Benchmark Model


Kenton K. Yee


Mellon Capital Management


Contemporary Accounting Research, Vol. 23, No. 3, pp. 833-877, Fall 2006

Abstract:     
This article solves a model that links earnings quality to the equity risk premium in an infinite-horizon consumption CAPM economy. In the model, risk-averse traders hold diversified portfolios consisting of a risk-free bond and shares of many risky firms. When constructing their portfolios, traders rely on noisy reported earnings and dividend payments for information about the risky firms. A new element of the model is an explicit representation of earnings quality based on reversing accrual errors that investors cannot observe. The model shows that earnings quality magnifies fundamental risk. Absent fundamental risk, poor earnings quality cannot affect the equity risk premium. Moreover, only the systematic (undiversified) component of earnings quality risk contributes to the equity risk premium. In contrast, all components of earnings quality risk affect earnings capitalization factors. The model ties together consumption-CAPM and accounting-based valuation research into one benchmark formula linking earnings quality to the equity risk premium and earnings capitalization factors.

Number of Pages in PDF File: 50

Keywords: Information quality, cost of capital, risk, return, diversification, earnings, valuation

JEL Classification: M41, M43, M49, G12, G13, G14, G31, G34

Accepted Paper Series





Download This Paper

Date posted: November 15, 2005  

Suggested Citation

Yee, Kenton K., Earnings Quality and the Equity Risk Premium: A Benchmark Model. Contemporary Accounting Research, Vol. 23, No. 3, pp. 833-877, Fall 2006. Available at SSRN: http://ssrn.com/abstract=921914

Contact Information

Kenton K. Yee (Contact Author)
Mellon Capital Management ( email )
50 Fremont Street, #3819
San Francisco, CA 94105
United States
415-975-3565 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 23,540
Downloads: 3,997
Download Rank: 1,042
References:  43
Citations:  9

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.297 seconds