Merav Rom
Interdisciplinary Center Herzlia (IDC)
Abstract: The paper develops an equity valuation model that relates growth in expected earnings to firm value. The modeling, in addition to growth, also incorporates non-recurring items as an adjustment for earnings. The analysis shows that the valuation function consists of three terms: (i) Permanent earnings model adjusted for non-recurring items, (ii) Current non-recurring items and, (iii) a Multiplier that mirrors both short-term growth and long-term growth, which multiplies next period expected earnings. The return model, in addition to unexpected earnings, incorporates revisions in the dollar amount of short-term growth (where its coefficient mirrors long-term growth), and non-recurring items. The paper also shows that like dividends, non-recurring items are irrelevant for purposes of forecasting and valuation, except via their impact on book value.
Back to Program
