Accounting Valuation Models: A Short Primer

• Published in: Abacus (Sydney) Vol. 43; no. 4; pp. 429 - 437
• Main Author: BRIEF, RICHARD P.
• Format: Journal Article
• Language: English
• Published: Melbourne, Australia Blackwell Publishing Asia 01.12.2007; Accounting Foundation, University of Sydney; Blackwell Publishing Ltd
• Series: Abacus
• Subjects: Abnormal earnings growth; Accounting; Accounting methods; Accounting standards; Accounting valuation models; Business accounting; Business studies; Corporate finance; Earnings; Financial accounting; Income; Mathematical models; Profits; Residual income valuation; Residuals; Statistics; Studies; Valuation; Valuation methods
• ISSN: 0001-3072; 1467-6281
• DOI: 10.1111/j.1467-6281.2007.00240.x

This note discusses basic issues related to residual income valuation (RIV) and abnormal earnings growth (AEG) models but has only scratched the surface of a complex subject. What clearly emerges from this ‘primer’ is the conclusion that AEG is a more complex valuation model than RIV. This complexity concerns both the mechanics and interpretation of AEG compared to RIV. Furthermore, a study by Penman (2005) raises a question about the usefulness of AEG compared to RIV. His comparisons between RIV and AEG are rather remarkable and suggest that RIV gives estimates of value which are more accurate and less variable than estimates based on AEG. Clearly, these results need further study.