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Risk adjusted equity valuation and accounting betas

Research output: Working paper

Publication date2000
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
<mark>Original language</mark>English

Publication series

NameAccounting and Finance Working Paper Series


In this paper we develop a general equity valuation model where abnormal earnings, back value, the discount factor and interest rates evolve stochastically. Focusing on the dynamics of abnormal earnings, we demonstrate the back value, abnormal earnings, "other information" and two risk adjustment terms are sufficient for valuation when pricing kernel risk is attributable to a single market factor. The risk adjustment terms depend on accounting betas reflecting the covariances between abnormal earnings and (i) the short interest rate, and (ii) the market risk factor.