Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer - HBS Working Knowledge
Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer
by Akash Chattopadhyay, Matthew R. Lyle, and Charles C.Y. Wang
This paper introduces a framework to investors and researchers interested in accounting-based valuation. The framework connects expected stock returns to accounting valuation anchors. It can be generalized to evaluate an enterprise's expected returns, and can be adapted to correct for the use of stale accounting data.
Author Abstract
We outline a framework in which accounting “valuation anchors" could be connected to expected stock returns. Under two general conditions, expected log returns is a log-linear function of a valuation (market value-to-accounting) multiple and the expected growth in the valuation anchor. We show that the framework can: 1) allow for expected enterprise returns, 2) correct for the use of stale accounting data in estimation, and 3) accommodate differences in information quality. This analytical formulation is tractable and flexible, and provides building blocks for further innovations in accounting valuation research.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: January 2021
- HBS Working Paper Number: 21-081
- Faculty Unit(s): Accounting and Management