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Forward Versus Trailing Earnings in Equity Valuation

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  • Kenton K. Yee

    (Columbia Business School)

Abstract

This article articulates how forward earnings are more accurate valuation attributes than trailing earnings. First, I show that, while linear accrual rules cannot achieve accurate trailing earnings-value relations in a setting with unobserved information, they can achieve accurate forward earnings-value relations. Second, I prove that, even when accrual rules are restricted so that forward earnings fails to be an exact valuation attribute, more-forward earnings are more accurate valuation attributes than less-forward earnings or trailing earnings. In conclusion, even under deficient accrual policies, more-forward earnings are more accurate valuation attributes—the more-forward, the more accurate.

Suggested Citation

  • Kenton K. Yee, 2004. "Forward Versus Trailing Earnings in Equity Valuation," Review of Accounting Studies, Springer, vol. 9(2), pages 301-329, June.
    • Handle: RePEc:spr:reaccs:v:9:y:2004:i:2:d:10.1023_b:rast.0000028192.03130.df
    DOI: 10.1023/B:RAST.0000028192.03130.df
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