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This text covers both financial and managerial accounting theory with a strong emphasis on accounting information systems. It examines the challenges faced by accounting information users and preparers, and the role accounting information systems play.
Accounting for Value teaches investors and analysts how to handle accounting in evaluating equity investments. The book's novel approach shows that valuation and accounting are much the same: valuation is actually a matter of accounting for value. Laying aside many of the tools of modern finance the cost-of-capital, the CAPM, and discounted cash flow analysis Stephen Penman returns to the common-sense principles that have long guided fundamental investing: price is what you pay but value is what you get; the risk in investing is the risk of paying too much; anchor on what you know rather than speculation; and beware of paying too much for speculative growth. Penman puts these ideas in touch with the quantification supplied by accounting, producing practical tools for the intelligent investor. Accounting for value provides protection from paying too much for a stock and clues the investor in to the likely return from buying growth. Strikingly, the analysis finesses the need to calculate a "cost-of-capital," which often frustrates the application of modern valuation techniques. Accounting for value recasts "value" versus "growth" investing and explains such curiosities as why earnings-to-price and book-to-price ratios predict stock returns. By the end of the book, Penman has the intelligent investor thinking like an intelligent accountant, better equipped to handle the bubbles and crashes of our time. For accounting regulators, Penman also prescribes a formula for intelligent accounting reform, engaging with such controversial issues as fair value accounting.
Explains financial analysis techniques, shows how to interpret financial statements, and discusses the analysis of fixed-income securities and the valuation of stocks.
This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.
Conducting an experiment Theresa Herrmann investigates why nonprofessional investors fail to incorporate disclosures on fair value estimates into their investment decision and what causes this exclusion. Differentiating between different types of disclosures and the development of the fair value (gain vs. loss) the results indicate that with a fair value gain, none of the disclosure information increases decision usefulness, irrespective of the presentation format. When a fair value loss occurs, fair value disclosures presented in a salient presentation format decrease decision usefulness. Thus, investors have varying information needs that are strongly linked to the development of a firm’s key asset.
The purpose of this book is to offer a more systematic and structured treatment of the research on accounting‐based valuation, with a primary focus on recent theoretical developments and the resulting empirical analyses that recognize the role of accounting information in making managerial decisions. Since its inception, valuation research in accounting has evolved primarily along an “empirically driven” path. In the absence of models constructed specifically to explain this topic, researchers have relied on economic intuition and theories from other disciplines (mainly finance and economics) as a basis for designing empirical analyses and interpreting findings. Although this literature has shed important light on the usefulness of accounting information in capital markets, it is obvious that the lack of a rigorous theoretical framework has hindered the establishment of a systematic and well‐structured literature and made it difficult to probe valuation issues in depth. More recently, however, progress has been made on the theoretical front. The two most prominent frameworks are (i) the “linear information dynamic approach” and (ii) the “real options‐based approach” which recognizes managerial uses of accounting information in the pursuit of value generation. This volume devotes its initial chapters to an evaluation of the models using the linear dynamic approach, and then provides a synthesis of the theoretical studies that adopt the real options approach and the empirical works which draw on them. The book also makes an attempt to revisit and critique existing empirical research (value-relevance and earnings-response studies) within the real options-based framework. It is hoped that the book can heighten interest in integrating theoretical and empirical research in this field, and play a role in helping this literature develop into a more structured and cohesive body of work. Value is of ultimate concern to economic decision-makers, and valuation theory should serve as a platform for studying other accounting topics. The book ends with a call for increased links of other areas of accounting research to valuation theory.
Developed for preparers of financial statements, independent auditors, and valuation specialists, this guide provides nonauthoritative guidance and illustrations regarding the accounting for and valuation of portfolio company investments held by investment companies within the scope of FASB ASC 946, Financial Services —Investment Companies, (including private equity funds, venture capital funds, hedge funds, and business development companies). It features16 case studies that can be used to reason through real situations faced by investment fund managers, valuation specialists and auditors, this guide addresses many accounting and valuation issues that have emerged over time to assist investment companies in addressing the challenges in estimating fair value of these investments, such as: Unit of account Transaction costs Calibration The impact of control and marketability Backtesting
Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.
Research, Standard Setting, and Global Financial Reporting aids researchers in conducting research relevant to global financial reporting issues, particularly those of interest to financial reporting standard setters. Research, Standard Setting, and Global Financial Reporting describes the relation between research and standard-setting issues; explains how a variety of research designs can be used to address questions motivated by standard-setting issues, including valuation research and event studies; offers examples of research addressing a specific global standard-setting issue - use of fair value in measuring accounting amounts; offers further opportunities for future research on specific standard-setting topics by providing motivating questions relating to the major topics on the agendas of the FASB and IASB; explains how the IASB aims to achieve its mission of developing a single set of high quality accounting standards that are accepted worldwide; summarizes extant evidence on the relative quality of accounting amounts across global standard-setting regimes and whether global financial reporting is achievable or even desirable. Research, Standard Setting, and Global Financial Reporting examines opportunities for future research on issues related to globalization of financial reporting by identifying motivating questions that are potentially avenues for future research.