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Dividend policy irrelevancy and the construct of earnings

Ohlson, James A., Ostaszewski, Adam and Gao, Zhan (2006) Dividend policy irrelevancy and the construct of earnings. CDAM research report, LSE-CDAM-2006-23. Centre for Discrete and Applicable Mathematics, London School of Economics and Political Science, London, UK.

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Abstract

In a neo-classical setting of equity-valuation, this paper develops a principle of dividend policy irrelevancy (DPI) to identify and exploit characteristics of earnings. The latter refers to the idea that a value-relevant variable can not reasonably be labeled "earnings" unless it satisfies certain analytical properties with intuitive appeal. The paper proceeds in two parts. The first part, which culminates in Proposition I, provides necessary and sufficient conditions for DPI. The second part concerns how DPI predicates constructs of earnings and their analytical properties. A key result, Proposition II, shows that one can use the analytical properties of earnings to deduce the core approach in practical equity-valuation, namely, measures of growth in expected earnings explain the price to forward-earnings ratio.

Item Type: Monograph (Report)
Official URL: http://www.cdam.lse.ac.uk
Additional Information: © 2006 the authors
Library of Congress subject classification: Q Science > QA Mathematics
Sets: Departments > Mathematics
Research centres and groups > Computational, Discrete and Applicable Mathematics@LSE (CDAM)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: LSE-CDAM-2006-23
Date Deposited: 13 Oct 2008 09:22
URL: http://eprints.lse.ac.uk/13796/

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