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Expected EPS and EPS Growth as Determinantsof Value

Author

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  • James A. Ohlson

    (Arizona State University)

  • Beate E. Juettner-Nauroth

    (Johannes Gutenberg-University)

Abstract

This paper develops a parsimonious model relating a firm’s price per share to, (i), next year expected earnings per share (or 12 months forward eps), (ii), short-term growth (FY-2 versus FY- l) in eps, (iii), long-term (asymptotic) growth in eps, and, (iv), cost-of-equity capital. The model assumes that the present value of dividends per share (dps) determines price, but it does not restrict how the dps-sequence is expected to evolve. All of these aspects of the model contrast sharply with the standard (Gordon/Williams) text-book approach, which equates the growth rates of expected eps and dps and fixes the growth rate and the payout rate. Though the constant growth model arises as a peculiar special case, the analysis in this paper rests on more general principles, including dividend policy irrelevancy. A second key result inverts the valuation formula to show how one expresses cost-of-capital as a function of the forward eps to price ratio and the two measures of growth in expected eps. This expression generalizes the text-book equation in which cost-of-capital equals the dps-yield plus the growth in expected eps.

Suggested Citation

  • James A. Ohlson & Beate E. Juettner-Nauroth, 2005. "Expected EPS and EPS Growth as Determinantsof Value," Review of Accounting Studies, Springer, vol. 10(2), pages 349-365, September.
    • Handle: RePEc:spr:reaccs:v:10:y:2005:i:2:d:10.1007_s11142-005-1535-3
    DOI: 10.1007/s11142-005-1535-3
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    References listed on IDEAS

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    1. Zhang, Xiao-Jun, 2000. "Conservative accounting and equity valuation," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 125-149, February.
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    Cited by:

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    2. Mark T. Bradshaw & Michael S. Drake & James N. Myers & Linda A. Myers, 2012. "A re-examination of analysts’ superiority over time-series forecasts of annual earnings," Review of Accounting Studies, Springer, vol. 17(4), pages 944-968, December.
    3. Cheng Lai, 2015. "Growth in residual income, short and long term, in the OJ model," Review of Accounting Studies, Springer, vol. 20(4), pages 1287-1296, December.
    4. Colin D. B. Clubb, 2013. "Information dynamics, dividend displacement, conservatism, and earnings measurement: a development of the Ohlson (1995) valuation framework," Review of Accounting Studies, Springer, vol. 18(2), pages 360-385, June.
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    7. Nowak, Arne & Fahling, Ernst, 2015. "The Influence of R&D Intensity on the Performance and Application of Fundamental and Relative Equity Valuation Methods – Part I," ISM Research Journal, International School of Management (ISM), Dortmund, vol. 2(1), pages 19-35.
    8. Hess, Dieter & Simon, Frederik & Weibels, Sebastian, 2025. "Interpretable machine learning for earnings forecasts: Leveraging high-dimensional financial statement data," CFR Working Papers 25-06, University of Cologne, Centre for Financial Research (CFR).
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    13. Zhihong Chen & Dan S. Dhaliwal & Hong Xie, 2010. "Regulation fair disclosure and the cost of equity capital," Review of Accounting Studies, Springer, vol. 15(1), pages 106-144, March.
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    15. Per Olsson, 2008. "Discussion of “inventory policy, accruals quality and information risk”," Review of Accounting Studies, Springer, vol. 13(2), pages 411-417, September.
    16. Stephanie A. Sikes & Robert E. Verrecchia, 2025. "Aggregate corporate tax avoidance and cost of capital," Review of Accounting Studies, Springer, vol. 30(3), pages 2868-2921, September.
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    19. Ying Cao & James N. Myers & Linda A. Myers & Thomas C. Omer, 2015. "Company reputation and the cost of equity capital," Review of Accounting Studies, Springer, vol. 20(1), pages 42-81, March.
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    22. Stephanie A. Sikes & Robert E. Verrecchia, 2015. "Dividend tax capitalization and liquidity," Review of Accounting Studies, Springer, vol. 20(4), pages 1334-1372, December.
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    25. Alexander Nekrasov & Maria Ogneva, 2011. "Using earnings forecasts to simultaneously estimate firm-specific cost of equity and long-term growth," Review of Accounting Studies, Springer, vol. 16(3), pages 414-457, September.

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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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