What is the ‘Abnormal Earnings Valuation Model’
The abnormal earnings valuation model is a method for determining a company’s worth that is based on book value and earnings. Also known as the residual income model, it looks at whether management’s decisions cause a company to perform better or worse than anticipated. The model says that investors should pay more than book value if earnings are higher than expected and less than book value if earnings are lower than expected
Explaining ‘Abnormal Earnings Valuation Model’
There are numerous other methods for valuing companies, including P/E ratio, price-to-book value ratio, return on equity, return on capital employed and discounted cash flow. Investors and analysts should not place too much emphasis on any one of these (or a number of other) measures of value because no single method can provide a complete picture of a company’s financial performance.
Further Reading
- Residual earnings valuation with risk and stochastic interest rates – meridian.allenpress.com [PDF]
- Linear accounting valuation when abnormal earnings are AR (2) – link.springer.com [PDF]
- Unrecorded intangible assets: Abnormal earnings and valuation – meridian.allenpress.com [PDF]
- Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates – www.jstor.org [PDF]
- Effect of R&D investments on persistence of abnormal earnings – www.emerald.com [PDF]
- The persistence of abnormal earnings and systematic risk – www.sciencedirect.com [PDF]
- The economic value of the R&D intangible asset – www.tandfonline.com [PDF]
- Comments onAn empirical assessment of the residual income valuation model' – www.sciencedirect.com [PDF]
- An empirical examination of the value relevance of intellectual capital using the Ohlson (1995) valuation model – www.emerald.com [PDF]
- Valuation and clean surplus accounting for operating and financial activities – onlinelibrary.wiley.com [PDF]
