nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2007‒11‒17
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Separate Valuation Relevance of Earnings, Book Value and their Components in Profit and Loss Making Firms: UK Evidence By Akbar, S
  2. Measuring performance and valuing firms: In search of the lost capital By Magni, Carlo Alberto
  3. The Impact of Media Attention on the Use of Alternative Earnings Measures By Koning, M.; Mertens, G.M.H.; Roosenboom, P.
  4. Residual income and value creation: An investigation into the lost-capital paradigm By Magni, Carlo Alberto
  5. Zelig and the Art of Measuring Excess Profit By magni, Carlo Alberto

  1. By: Akbar, S
    Abstract: This study examines the separate value relevance of earnings, book value and their components in profit and loss-making firms. The investigation take place in a context that both profit and loss-making firms have different features that might affect conclusions concerning the value relevance of earnings and book value partitions. Thus, we are establishing relationships between disaggregated accounting data and the market value of firms in the profit and loss-making firms in cross-sectional valuation models. These results suggest that for loss-making firms, earnings and book value partitions are not generally valuation relevant. However, for profit-making firms, the earnings partition into working capital from operations and non-current accruals is valuation relevant in almost all cross-sections. Book value partitions have also some valuation relevance for profit-making firms, in the presence of earnings partitions.
    Keywords: earnings; book value; loss making firms; value relevance
    JEL: M41 M21
    Date: 2007
  2. By: Magni, Carlo Alberto
    Abstract: Residual income as commonly described in academic papers and in real-life applications may be formally described as a function of three variables: (i) the capital invested, (ii) the rate of return, (iii) the opportunity cost of capital. This paper shows that a different paradigm of residual income is generated if a fourth element is added: (iv) the capital that investors lose if they infuse their funds into the firm (or project). The lost-capital paradigm has various interesting economic, nancial, accounting interpretations and bears intriguing formal and conceptual relations to the standard paradigm. It may be soundly employed in real-life applications as a tool for rewarding managers as well as for appraising firms. Firm value is shown to be a function of total abnormal earnings and independent of time, if the new paradigm is used: what matters is only the book value and the sum of total expected residual incomes, not the periods in which they are generated. This aggregation property is particular important for highlighting the link between accounting values and market values. A numerical example illustrates the practical implementation of the new paradigm to the Economic Value Added and the Edwards-Bell-Ohlson model; also, a model is presented which has the nice property of being aligned in sign with the Net Present Value: this makes it a good candidate for use in value-based management.
    Keywords: Corporate finance; management accounting; residual income; performance measurement; lost capital; value-based management; firm valuation; abnormal earnings aggregation.
    JEL: G11 G12 M41 G31 M52 G30 M40
    Date: 2007–09
  3. By: Koning, M.; Mertens, G.M.H.; Roosenboom, P. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The practice of reporting earnings measures that deviate from generally accepted accounting principles (non-GAAP measures) has received negative attention in the media. Regulators argue in favour of reporting GAAP earnings measures and utter their concerns that investors may be misled by the use of non-GAAP measures. In a period of increased regulatory concern for these reporting practices, we explore whether there has been a shift away from the use of non-GAAP metrics. We analyse a sample of earnings press releases in the period 1999-2004 from companies listed at Euronext Amsterdam. Our findings indicate that reporting non-GAAP measures is a common practice and that the frequency of reporting non-GAAP earnings measures has increased despite the concerns voiced by regulators. On the other hand, investors seem to have become more hesitant towards the use of alternative earnings measures for their decision-making. Our findings suggest that investors find non-GAAP measures informative before 2003, but they turn away from these measures in the following years and price GAAP earnings metrics instead. Together, these findings suggest that the negative media attention for non-GAAP measures has influenced the perception of investors, but not of managers.
    Keywords: Event study;Information content;Non-GAAP earnings;Regulation;Value relevance;
    Date: 2007–10–25
  4. By: Magni, Carlo Alberto
    Abstract: This paper presents a new paradigm of residual income, originally introduced by Magni (2000a, 2000b, 2003), and stresses the major role played by the capital lost by the investors. Such a capital may be alternatively interpreted as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost-capital residual income with the classical paradigm; many appealing properties are derived, among which a property of earnings aggregation. Different concepts and results, provided by different authors in such different fields as microeconomics, management accounting and corporate finance, are conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, incentive compensation, capital budgeting decision-making.
    Keywords: Management accounting; residual income; paradigm; value creation; incentive compensation; outstanding capital; lost capital; net present value; book value; market value; earnings aggregation. aggregation. 1
    JEL: G11 M41 G12 G31 M40 G30 M52 M21
    Date: 2007–11–13
  5. By: magni, Carlo Alberto
    Abstract: This paper tells the story of a student of economics and finance who meets a couple of alleged psychopaths, suffering from the ‘syndrome of Zelig’, so that they think of themselves to be experts of economic and financial issues. While speaking, they come across the concept of excess profit. The student tells them that the formal way to translate excess profit is to apply Stewart’s (1991) EVA model and shows that this model is equivalent to Peccati’s (1987, 1991, 1992) decomposition model of a project’s Net Present (Final) Value. The ‘Zeligs’ listen to him carefully, then try to apply themselves the EVA model: Unfortunately, both She-Zelig and He-Zelig seem to feel uneasy with basic mathematics, so they make some mistakes. Consequently, each of them miscalculates the excess profit. Strangely enough, they make different mistakes but both get to the (correct) Net Final Value of the project and, in addition, their excess profits do coincide. Further, the (biased) models presented by the Zeligs, though different from the EVA model, seem to bear strong relations to the latter. The student is rather surprised. I give my version of this event, arguing that the Zeligs are offering us a rational way of measuring excess profit, alternative to the standard one (EVA) but equally valuable. As I see it, they are only adopting a different cognitive interpretation of the concept of excess profit, which is based on a counterfactual conditional that differs from Stewart’s and Peccati’s.
    Keywords: Excess profit; residual income; economic value dded; net final value; systemic value added; counterfactual
    JEL: G11 G31 C0 M4 G00 G30 D46 B40 M41 G12 A12 M2
    Date: 2006–06

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