The Role of Disaggregation of Earnings in Stock Valuation and Earnings Forecasting

49 Pages Posted: 19 Jan 2013

Date Written: October 18, 2012

Abstract

This paper compares and contrasts two accounting information systems, the aggregate earnings system and the disaggregated cash flow/accrual system, examining their relative performance in stock valuation and in forecasting of earnings. It finds, in general, that the forecasts of earnings and predicted market values from the cash flow and accrual system have smaller forecasting errors than those from the aggregate earnings system. The adjusted R-squareds from the disaggregated system are in the main higher than those from the aggregated system when considering the explanatory power of the model-predicted values. The results also show that the cash flow and accrual system forecasts dominate the aggregate earnings system forecasts in a large majority of industries.

Keywords: cash flow, accruals, forecasts of earnings, stock valuation

JEL Classification: C53, G12, M41

Suggested Citation

Wang, Pengguo, The Role of Disaggregation of Earnings in Stock Valuation and Earnings Forecasting (October 18, 2012). Available at SSRN: https://ssrn.com/abstract=2202708 or http://dx.doi.org/10.2139/ssrn.2202708

Pengguo Wang (Contact Author)

Xfi, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

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