Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer
18 Pages Posted: 27 Jan 2021
Date Written: January 27, 2021
We outline a framework in which accounting “valuation anchors" could be connected to expected stock returns. Under two general conditions, expected log returns is a log- linear function of a valuation (market value-to-accounting) multiple and the expected growth in the valuation anchor. We show that the framework can: 1) allow for expected enterprise returns, 2) correct for the use of stale accounting data in estimation, and 3) accommodate differences in information quality. This analytical formulation is tractable and flexible, and provides building blocks for further innovations in accounting valuation research.
Keywords: Expected returns, Present value, Valuation multiples
JEL Classification: D83, G12, G14, M41
Suggested Citation: Suggested Citation