Accounting data and value: The basic results

This paper develops the basic results relating equity value to accounting data - earnings, book values, and dividends. It contributes by stating all results in simple analytical terms and by gradually bringing out constructs that lead to more sophisticated modeling. A thorough analysis of permanent earnings and economic earnings provides the starting point because of their status as benchmark models. The paper then proceeds by adding features that lead to models with empirical content. Four themes recur throughout. First, the analysis considers both earnings and book values and it shows how their differential properties influence the conceptualization of value. Second, earnings dominate book values as a relevant valuation attribute. Third, much of the analysis centers on explaining the price-to-forward-earnings ratio. Fourth, all insights exploit the (Modigliani and Miller) notion that wealth creation can be conceptualized as being something quite distinct from wealth distribution.