Authors: Claude Bergeron; Jean-Pierre Gueyie; Komlan Sedzro
Addresses: École des sciences de l'administration (ESA), Université du Québec (TÉLUQ), Québec, G1K 9H6, Canada ' École des sciences de la gestion (ESG), Université du Québec à Montréal (UQÀM), Montréal, Québec, H3C 4R2, Canada ' École des sciences de la gestion (ESG), Université du Québec à Montréal (UQÀM), Montréal, Québec, H3C 4R2, Canada
Abstract: This paper integrates the long-run covariance between aggregate consumption and firm earnings into the stock valuation process. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we use the intertemporal framework of the consumption capital asset pricing model (CCAPM) to explore the effect of systematic earnings risks on intrinsic stock values. Our main results show that the equilibrium price of a stock is positively related to its long-run earnings growth rate, and negatively related to its earnings-consumption beta, obtained from its long-run covariance between earnings growth and aggregate consumption growth. This suggests that long-run risk measured with earnings affects the theoretical value of a firm. Overall, our work suggests that the long-run concept of risk, using accounting earnings, represents an appropriate parameter for estimating the equity value of a firm.
Keywords: stock valuation; accounting beta; intertemporal model; long-run risk; CCAPM; consumption capital asset pricing model.
American Journal of Finance and Accounting, 2018 Vol.5 No.2, pp.151 - 172
Received: 09 Jun 2017
Accepted: 05 Aug 2017
Published online: 07 Mar 2018 *