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Using Accounting Information for Consumption Planning and Equity Valuation

Kenton K. Yee

Mellon Capital Management

August 30, 2006

This article develops a consumption-based valuation model that treats earnings and cash flow as complementary information sources. The model integrates three ideas that do not appear in traditional valuation models: (i) earnings provide information about future shocks to cash flow; (ii) earnings contain indiscernible transient accruals; and (iii) investors use cash flow and earnings to make allocation and consumption decisions and set price. Accordingly, the quality of earnings affects production and consumption as well as price. Among other implications, the model reveals that a valuation coefficient is not just a capitalization factor; it is the product of a capitalization factor and a structural factor reflecting earnings quality and accounting bias.

Number of Pages in PDF File: 36

Keywords: earnings quality, CAPM, equity risk premium, DCF, resource allocation

JEL Classification: D51, E21, G12, G14, M21, M41

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Date posted: August 31, 2006  

Suggested Citation

Yee, Kenton K., Using Accounting Information for Consumption Planning and Equity Valuation (August 30, 2006). Available at SSRN: https://ssrn.com/abstract=927331 or http://dx.doi.org/10.2139/ssrn.927331

Contact Information

Kenton K. Yee (Contact Author)
Mellon Capital Management ( email )
50 Fremont Street, #3819
San Francisco, CA 94105
United States
415-975-3565 (Phone)
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References:  36
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