An International Analysis of Historical and Forecast Earnings in Accounting-Based Valuation Models

Authors

  • Ran Barniv,

    1. The authors are respectively, from the Department of Accounting, Graduate School of Management, Kent State University; and the Department of Accounting, College of Business, Ball State University.
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  • Mark Myring

    Corresponding author
    1. The authors are respectively, from the Department of Accounting, Graduate School of Management, Kent State University; and the Department of Accounting, College of Business, Ball State University.
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  • They acknowledge the helpful comments of an anonymous referee, Martin Walker (an editor), Teri Conover, Tim Doupnik, Don Herrman and Ray King. The comments of Ed Swanson (the discussant) and other participants in the annual meeting of the AAA, and participants in the accounting workshop at Case Western Reserve University are also appreciated. Data are publicly available from Standard & Poor's Global Vantage, Thomson Financial's I/B/E/S International Inc., and other sources identified in the paper.

* Address for correspondence: Ran Barniv, Department of Accounting, Graduate School of Management, Kent State University, Kent, OH 44242, USA.
e-mail: Rbarniv@bsa3.kent.edu

Abstract

Abstract:  In this paper we examine whether the valuation properties of historical accounting amounts, namely earnings and equity book value, differ from those of forecasted earnings for firms in 17 developed countries classified into six accounting regimes. We compare the performance of a historical model and a residual-income forecast model for explaining security prices. The historical model uses the book value of equities and actual historical earnings and the forecast model uses the book value of equities and analysts' forecasts of earnings in the residual income for estimating the intrinsic value of the firm. The results suggest that book values, historical earnings or forecasted earnings are value relevant in most regimes and countries examined. The forecast model offers significantly greater explanatory power for security prices than the historical model in the Anglo-Saxon and North American countries, Japan, Germany, and three Nordic countries. The explanatory power of the historical model is similar to that of the forecast model in the Latin countries, two Nordic countries, and Switzerland. We find that the forecast model performs similarly to the historical model where financial analysts' forecasts are noisy and analysts are less active. Further results indicate that the forecasted earnings are more value-relevant than the historical earnings in countries with stronger investor protection laws, less conservative GAAP, greater income conservatism, and more transparent accounting systems.

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