Download or read book Essays on the Use of Earnings Dynamics as an Earnings Benchmark by Financial Market Participants written by Yin Yu and published by . This book was released on 2010 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation theory (Ohlson and Juettner-Nauroth (OJ), 2005) demonstrates that Abnormal Earnings Growth AEG drives firm value. There are three implications. First, a firm ought to grow at the rate of cost of capital net of dividends paid out, similar to a savings bank account. This characterization has been labeled as earnings dynamics (ED) in Ohlson (1991). Second, Abnormal earnings growth forecast ought to translate previous knowledge of past earnings and dividend into earnings growth potential beyond the firms's expected return and firm value as well. The last, if the market does not completely adjust to abnormal earnings growth information, portfolio created based on abnormal earnings growth ought to produce arbitrage returns. Those three implications are developed into papers as follows: the first paper tests whether the market recognizes the forecast of abnormal growth in earnings as benchmark for performance when analysts announce their earnings forecasts. The second paper examines whether higher abnormal growth expectation in the current year will yield higher future accounting and stock performances. Results indicate that the market uses the ED information asymmetrically to interpret bad news from the first analyst earnings forecasts and seem to punish dividend payouts if it leads to the ED forecast to be lower than the past earnings. The evidence in the second paper shows that higher abnormal earnings growth leads to higher future accounting performance over following two years and continue to persist up to four years. Arbitrage profit based on abnormal earnings growth is profitable and significant in 23 out of 23 years. After control for expected abnormal earnings growth and the cost of capital, regression results show that B/M and E/P anomaly does not go away. Results indicate that abnormal earnings growth is another valuation anomaly separate from B/M and E/P. A hedge test provides the evidence that abnormal earning growth strategy can be refined by controlling B/M or E/P effect, to make even greater arbitrage return.