The Abnormal Earnings Growth Model, Two Exogenous Discount Rates, and Taxes
: In the abnormal earnings growth (AEG) valuation model of Ohlson and Juettner‐Nauroth (2005), there is one (constant) discount rate and no company or personal taxes. The parsimonious model specification focuses on bottom‐line earnings and growth in abnormal bottom‐line earnings and can hence be vi...
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Published in | Journal of business finance & accounting Vol. 38; no. 5-6; pp. 505 - 535 |
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Main Authors | , |
Format | Journal Article |
Language | English |
Published |
Oxford, UK
Blackwell Publishing Ltd
01.06.2011
Wiley Blackwell |
Series | Journal of Business Finance & Accounting |
Subjects | |
Online Access | Get full text |
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Summary: | : In the abnormal earnings growth (AEG) valuation model of Ohlson and Juettner‐Nauroth (2005), there is one (constant) discount rate and no company or personal taxes. The parsimonious model specification focuses on bottom‐line earnings and growth in abnormal bottom‐line earnings and can hence be viewed as an equity‐level model. Disregarding taxes, we first extend this model to a firm‐level model based on operating earnings and growth in abnormal operating earnings, allowing for two exogenous discount rates: the required rate of return under all‐equity financing and the borrowing rate. Dividend policy irrelevance holds for this model. Using the firm‐level model as a stepping stone, a new equity‐level model is developed where dividends are discounted at a leverage‐dependent varying cost of equity capital. Dividend policy irrelevance holds for this model, too. Finally, the firm‐level and equity‐level models are extended to a situation with company and personal taxes. Dividend policy irrelevance then no longer holds, except in the tax‐neutrality case in Miller (1977). |
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Bibliography: | istex:34110A6DD8784868303A145987FE7D79D1193E9E ArticleID:JBFA2227 ark:/67375/WNG-0KFW8JZV-2 ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
ISSN: | 0306-686X 1468-5957 1468-5957 |
DOI: | 10.1111/j.1468-5957.2010.02227.x |