| This dissertation studies the link from current to future accounting information by investigating what determines residual income and by exploring the role of “other information”—information other than historical residual income—in the implementation of the residual income valuation model (RIM).; I first investigate determinants of abnormal return on equity (ROE) by analyzing the impact of value-creation and value-recording processes on the persistence and the permanent level of abnormal ROE. I rely on economic theories to characterize economic rents and develop an empirical measure to capture the effect of conservative accounting. As expected, industry abnormal ROE increases with industry concentration, industry level barriers to entry, and industry conservative accounting factors. Also as expected, firm differential abnormal ROE increases with market share, firm size, firm level barriers to entry, and firm conservative accounting factors. Integrating determinants of abnormal ROE into RIM doubles its explanatory power for the variation in the market-to-book ratio.; I then study the role of other information by comparing the usefulness of explicitly identified other information items with that of analysts' forecasts in predicting future abnormal ROE and in explaining the market-to-book ratio. The results indicate that when used separately, the former has higher explanatory power than the latter, and when used jointly, the two complement each other. Additional analyses suggest that explicitly identified other information items are especially important for firms with bad news, firms in high-tech industries, or firms with high R&D capital.; This dissertation integrates the impact of a firm's economic circumstances and accounting policies on RI into RIM implementations, and provides new insights into RI predictions, RIM implementations, and general issues in accounting-based valuation. |
