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Linear information dynamics, aggregation, dividends and ‘dirty surplus’ accounting

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Listed:
  • David Ashton
  • Terry Cooke
  • Mark Tippett
  • Pengguo Wang

Abstract

We generalise the Ashton et al. (2003) Aggregation Theorem by demonstrating how the market value of equity disaggregates into its recursion and real (adaptation) components when the linear information dynamics incorporate a dirty surplus adjustment and also, when dividends are paid. Our analysis shows that ignoring the dirty surplus adjustment will, in general, induce biases into the functional expressions for the recursion and real (adaptation) values of equity. Furthermore, we show that whilst the recursion value of equity is independent of dividend policy, the real (adaptation) value of equity is affected by the dividend policy invoked by the firm. Tabulated results show that the difference in equity value between a dividend and a non-dividend paying firm is most pronounced at low levels of the recursion value.

Suggested Citation

  • David Ashton & Terry Cooke & Mark Tippett & Pengguo Wang, 2004. "Linear information dynamics, aggregation, dividends and ‘dirty surplus’ accounting," Accounting and Business Research, Taylor & Francis Journals, vol. 34(4), pages 277-299.
    • Handle: RePEc:taf:acctbr:v:34:y:2004:i:4:p:277-299
    DOI: 10.1080/00014788.2004.9729973
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    References listed on IDEAS

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    1. David Ashton & Terry Cooke & Mark Tippett, 2003. "An Aggregation Theorem for the Valuation of Equity Under Linear Information Dynamics," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 413-440.
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    5. David Ashton & Terry Cooke & Mark Tippett, 2003. "An Aggregation Theorem for the Valuation of Equity Under Linear Information Dynamics," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 413-440, April.
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    Cited by:

    1. Pengguo Wang, 2014. "On the relevance of earnings components in valuation and forecasting," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 399-413, April.

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