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  • 2021
  • Working Paper
  • HBS Working Paper Series

Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer

By: Akash Chattopadhyay, Matthew R. Lyle and Charles C.Y. Wang
  • Format:Print
  • | Language:English
  • | Pages:18
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Abstract

We outline a framework in which accounting “valuation anchors" could be connected to expected stock returns. Under two general conditions, expected log returns is a log-linear function of a valuation (market value-to-accounting) multiple and the expected growth in the valuation anchor. We show that the framework can: 1) allow for expected enterprise returns, 2) correct for the use of stale accounting data in estimation, and 3) accommodate differences in information quality. This analytical formulation is tractable and flexible, and provides building blocks for further innovations in accounting valuation research.

Keywords

Expected Returns; Present Value; Investment Return; Accounting; Valuation; Information; Framework

Citation

Chattopadhyay, Akash, Matthew R. Lyle, and Charles C.Y. Wang. "Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer." Harvard Business School Working Paper, No. 21-081, January 2021.
  • SSRN
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About The Author

Charles C.Y. Wang

Accounting and Management
→More Publications

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  • The Virtues of Stock Buybacks By: Jesse M. Fried and Charles C.Y. Wang
  • How Much Should We Trust Staggered Difference-In-Differences Estimates? By: Andrew C. Baker, David F. Larcker and Charles C.Y. Wang
  • Corporate Governance in Business Analysis and Valuation By: Charles C.Y. Wang
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