Monday, September 12, 2011

Discussion of 'Using Earnings Forecasts to Simultaneously Estimate Firm-specific Cost of Equity and Long-term Growth' Review of Accounting Studies 16, 3 (2011) 458-463

Accounting-based valuation models allow us to develop rigorous estimates of either value or the expected rate of return on equity capital (i.e., ERR) without making steady-state forecasts that rely on ad hoc assumptions about dividend policy. Hence, these models have great potential. Their ultimate usefulness, however, depends on the extent to which users of them make assumptions about future residual income that are consistent with the underlying accounting. Nekrasov and Ogneva contribute by developing a methodology that allows us to integrate information about accounting attributes such as conservatism into our estimates of the growth rate in residual income. Hence, their methodology can be used to improve our understanding of the role that conservatism plays in determining growth. This, in turn, improves our ability to estimate key parameters such as value and the expected rate of return on equity capital.