Essays on growth in expected earnings, returns models and equity valuation

This dissertation consists of two papers: The first paper develops an equity valuation model that relates growth in expected earnings to firm value. The modeling, in addition to growth, also incorporates non-recurring items as an adjustment for earnings. The analysis shows that the valuation function consists of three terms: (i) "Permanent earnings model" ( i.e., capitalized earnings) adjusted for non-recurring items, (ii) Current non-recurring items and, (iii) a "Multiplier" that mirrors both short-term growth and long-term growth, which multiplies next period expected earnings. This modeling implies that the accounting is conservative, indicating that growth and conservative accounting are two sides of the same coin. The paper also shows that like dividends, non-recurring items are irrelevant for purposes of forecasting and valuation, except via their impact on book value.;The second paper derives a returns model from the parameterized valuation function presented in Ohlson-Juettner (OJ) (2003). This returns model (returns model OJ) in addition to unexpected earnings incorporates two pieces of new information on growth in expected earnings: (1) Revisions in analysts' forecast on short-term growth in expected earnings; (2) Forecast on the expected increase/decrease of short-term growth in expected earnings in the estimated horizon (i.e., the "trend"). The analysis shows that the coefficients on (1)and (2)are: (i) both positive, and (ii) of (approximately) the same order of magnitude, and significantly of a higher order of magnitude than the coefficient on unexpected earnings. The paper also derives the returns model from a parameterized valuation formula of the residual income valuation (RIV) model (returns model BV), and compares the features of this returns model to the ones of the returns model OJ. This comparison indicates that the difference between the two returns models hinges on two elements: (i) the scaling of the coefficients---the coefficients in the returns model OJ are (approximately) 1/r times the coefficients in the returns model BV (where r is the cost of capital), and (ii) the second term (in addition to unexpected earnings) in the returns model OJ is the first difference of the second term in the returns model BV.