An International Analysis of Historical and Forecast Earnings in Accounting-Based Valuation Models

23 Pages Posted: 3 Oct 2006

See all articles by Ran Barniv

Ran Barniv

Kent State University - Department of Accounting

Mark Myring

Ball State University - Department of Accounting

Abstract

In this paper we examine whether the valuation properties of historical accounting amounts, namely earnings and equity book value, differ from those of forecasted earnings for firms in 17 developed countries classified into six accounting regimes. We compare the performance of a historical model and a residual-income forecast model for explaining security prices. The historical model uses the book value of equities and actual historical earnings and the forecast model uses the book value of equities and analysts' forecasts of earnings in the residual income for estimating the intrinsic value of the firm. The results suggest that book values, historical earnings or forecasted earnings are value relevant in most regimes and countries examined. The forecast model offers significantly greater explanatory power for security prices than the historical model in the Anglo-Saxon and North American countries, Japan, Germany, and three Nordic countries. The explanatory power of the historical model is similar to that of the forecast model in the Latin countries, two Nordic countries, and Switzerland. We find that the forecast model performs similarly to the historical model where financial analysts' forecasts are noisy and analysts are less active. Further results indicate that the forecasted earnings are more value-relevant than the historical earnings in countries with stronger investor protection laws, less conservative GAAP, greater income conservatism, and more transparent accounting systems.

Suggested Citation

Barniv, Ran and Myring, Mark, An International Analysis of Historical and Forecast Earnings in Accounting-Based Valuation Models. Journal of Business Finance & Accounting, Vol. 33, No. 7-8, pp. 1087-1109, September/October 2006, Available at SSRN: https://ssrn.com/abstract=934612 or http://dx.doi.org/10.1111/j.1468-5957.2006.00596.x

Ran Barniv (Contact Author)

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1112 (Phone)
330-672-2548 (Fax)

Mark Myring

Ball State University - Department of Accounting ( email )

2000 W. University Ave.
Muncie, IN 47306
United States

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