Residual Income Valuation: The Problems

24 Pages Posted: 24 May 2000

See all articles by James A. Ohlson

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: March 2000


This paper identifies problems related to RIV in an equity valuation context. Three problems are discussed. First, on a per share basis clean surplus will not generally hold if there are expected changes in shares outstanding; this aspect eliminates a necessary condition for the RIV-formula to be valid. Second, an all equity approach does not work if the firm plans to bring in "new" shareholders who derive a net benefit from their capital contributions. Third, GAAP violates clean surplus because some capital contributions are not accounted for in market value terms. As an alternative to RIV, the paper shows that it makes more economic/accounting sense to focus on expected eps, adjusted for dps, as a valuation attribute instead of current book value and expected residual earnings.

JEL Classification: G12, M41

Suggested Citation

Ohlson, James A., Residual Income Valuation: The Problems (March 2000). Available at SSRN: or

James A. Ohlson (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information