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Financial Forecasting, Risk and Valuation: Accounting for the Future

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  • STEPHEN H. PENMAN

Abstract

Valuation involves forecasting payoffs and discounting expected payoffs for risk. Forecasting is often seen as the province of the statistician, risk determination the province of asset pricing. This paper elaborates on the idea that financial forecasting, risk determination and valuation are a matter of accounting. Accounting not only provides information to forecast payoffs but also specifies the payoffs to be forecasted. Further, accounting determines the transition from the present to the future and thus implicitly the evolutionary parameters that a statistician might estimate for forecasting. Accounting also bears on risk determination in the way it handles uncertainty. Accordingly, accounting is involved in both the numerator and the denominator of a valuation model. Indeed, a valuation model is a model of accounting for the future, and the effectiveness of a valuation model rides on the accounting principles employed.

Suggested Citation

  • Stephen H. Penman, 2010. "Financial Forecasting, Risk and Valuation: Accounting for the Future," Abacus, Accounting Foundation, University of Sydney, vol. 46(2), pages 211-228, June.
    • Handle: RePEc:bla:abacus:v:46:y:2010:i:2:p:211-228
    DOI: 10.1111/j.1467-6281.2010.00316.x
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    Cited by:

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    2. Clout, Victoria J. & Willett, Roger J., 2016. "Earnings in firm valuation and their value relevance," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(3), pages 223-240.
    3. Demmer, Matthias, 2015. "Improving profitability forecasts with information on earnings quality," Discussion Papers 2015/16, Free University Berlin, School of Business & Economics.
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    6. D.J. Johnstone, 2015. "Information and the Cost of Capital in a Mean-Variance Efficient Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 79-100, January.
    7. Mihai CARP, 2016. "Empirical Study regarding the Influence of the Quality of Financial Information on the Value of Listed Companies," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 14(133), pages 1-78, January.
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    9. Christian Bach, 2011. "Conservatism in Corporate Valuation," CREATES Research Papers 2011-32, Department of Economics and Business Economics, Aarhus University.
    10. Peter R. Joos & Joseph D. Piotroski, 2017. "The best of all possible worlds: unraveling target price optimism using analysts’ scenario-based valuations," Review of Accounting Studies, Springer, vol. 22(4), pages 1492-1540, December.
    11. Brasel, Kelsey R. & Hill, Mary S. & Taylor, Gary K., 2022. "The relevance of GAAP vs. non-GAAP net assets to creditors: An examination of the credit default swap market," Advances in accounting, Elsevier, vol. 56(C).
    12. Luiz Claudio Louzada & Márcio Augusto Gonçalves, 2018. "The Moderating Effect of the Sector’s Level of Concentration on the Relationship Between Balance Sheet Composition and the Firm’s Competitive Advantage," Brazilian Business Review, Fucape Business School, vol. 15(6), pages 512-532, November.
    13. Heather Anderson & Howard Chan & Robert Faff & Yew Kee Ho, 2012. "Reported earnings and analyst forecasts as competing sources of information: A new approach," Australian Journal of Management, Australian School of Business, vol. 37(3), pages 333-359, December.

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