Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer

18 Pages Posted: 27 Jan 2021

See all articles by Akash Chattopadhyay

Akash Chattopadhyay

University of Toronto - Rotman School of Management

Matthew R. Lyle

Goizueta Business School

Charles C. Y. Wang

Harvard Business School (HBS)

Date Written: January 27, 2021

Abstract

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

Chattopadhyay, Akash and Lyle, Matthew R. and Wang, Charles C. Y., Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer (January 27, 2021). Harvard Business School Accounting & Management Unit Working Paper No. 21-081, Available at SSRN: https://ssrn.com/abstract=3774442 or http://dx.doi.org/10.2139/ssrn.3774442

Akash Chattopadhyay

University of Toronto - Rotman School of Management ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

Matthew R. Lyle

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Charles C. Y. Wang (Contact Author)

Harvard Business School (HBS) ( email )

Soldiers Field
Boston, MA 02163
United States

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