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A General Affine Earnings Valuation Model

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  • Andrew Ang

    (Columbia University and NBER)

  • Jun Liu

    (UCLA)

Abstract

We introduce a methodology, with two applications, that incorporates stochastic interest rates, heteroskedasticity and risk aversion into the residual income model. In the first application, goodwill is an affine (constant plus linear term) function where the constant and linear coefficients are time-varying. Homoskedastic risk gives rise to a constant risk premium, while heteroskedastic risk gives rise to linear state-dependent risk premiums. In the second application, we present a class of models where a non-linear function for the price-to-book ratio can be derived. We show how interest rates, risk, profitability and growth affect the price-to-book ratio.

Suggested Citation

  • Andrew Ang & Jun Liu, 2001. "A General Affine Earnings Valuation Model," Review of Accounting Studies, Springer, vol. 6(4), pages 397-425, December.
    • Handle: RePEc:spr:reaccs:v:6:y:2001:i:4:d:10.1023_a:1012497814339
    DOI: 10.1023/A:1012497814339
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