Forward Versus Trailing Earnings in Equity Valuation

40 Pages Posted: 1 Jun 2004

Abstract

This article articulates how forward earnings are more accurate valuation attributes than trailing earnings. First, I show that, while linear accrual rules cannot achieve accurate trailing earnings-value relations in a setting with unobserved information, they can achieve accurate forward earnings-value relations. Second, I prove that, even when accrual rules are restricted so that forward earnings fails to be an exact valuation attribute, more-forward earnings are more accurate valuation attributes than less-forward earnings or trailing earnings. In conclusion, even under deficient accrual policies, more-forward earnings are more accurate valuation attributes - the more-forward, the more accurate.

Keywords: Accruals, beliefs, earnings, forecasts, valuation

JEL Classification: M41, M44, G12

Suggested Citation

Yee, Kenton K., Forward Versus Trailing Earnings in Equity Valuation. Review of Accounting Studies, Vol. 9, No. 2-3, pp. 301-329, June 2004, Available at SSRN: https://ssrn.com/abstract=550601

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