This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang (2000), who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and...

This paper develops the geometric representation of an equity valuation model to illustrate how equity value relates simultaneously to profitability, earnings, and equity book value, and empirically tests those relations. We depict Zhang's (2000) model as a quot;surfacequot; in the...

Employing a real options based valuation model, this paper examines the valuation roles of earnings and book value and cross-sectional differences in valuation properties. Consistent with theoretical predictions, we find that (i) as profitability increases, the value impact of earnings increases...

Applying an option-based valuation approach, we develop and test a model that addresses the incremental value relevance of segment data beyond firm-level accounting data. Prior studies (e.g., Zhang 2000; Biddle et al. 2001) show that firm value relates to accounting data (in part) because accounting...

Economic reasoning suggests that capital follows profitability. This study introduces into residual income valuation quot;capital follows profitabilityquot; investment dynamics whereby capital investments are guided by the profitability of underlying investment opportunities. These investment...

This paper develops a theoretical model to explain corporate divestment in the context of accounting-based valuation and provides empirical evidence to support the model's predictions. Building on Zhang's (2000) real-options-based equity value model, we develop a model to explain why firms with...

This paper examines the degree to which managerial discretion over accruals relating to loan losses in the Canadian banking industry during 1977-87 may have been utilized to manage regulatory capital, taxable income, and reported earnings. These years reflect a unique period in which accounting...

This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang (2000), who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and...