A Synthesis of security valuation theory and the role of dividends, cash flows, and earnings*

Abstract. The paper reviews and synthesizes modern finance valuation theory and the ways it relates to the valuation of firms and accounting data. These models permit uncertainty and multiple dates, and the concept of intertemporal consistency in equilibria becomes critical. The key conclusions are (1) the basic theoretical insight derives from a powerful condition of no arbitrage; there is no role for complete markets in basic valuation theory; (2) only anticipated dividends can serve as a generically valid capitalization (present value) attribute of a security; (3) the notion of risk is general, and models such as the CAPM occur only as special cases; (4) the notion that one can capitalize cash flows rather than dividends requires additional (relatively stringent) assumptions; (5) existing theory of “pure†earnings under uncertainty lacks unity regarding their meaning and characteristics. It is argued that only one concept of “pure†earnings makes economic sense. In this case earnings are sufficient to determine a security's pay†off, price plus dividends, consistent with some prior research but inconsistent with others. RA©sumA©. L'auteur procA¨de A l'examen et A la synthA¨se de la thA©orie moderne de l'A©valuation financiA¨re et de la faA§on dont elle se rapporte A l'A©valuation des entreprises et des donnA©es comptables. Les modA¨les utilisA©s prA©voient les cas d'incertitude et de dates multiples, et la notion d'uniformitA© intertemporelle en situation d'A©quilibre revAat une importance critique. Les principales conclusions de l'auteur sont les suivantes: 1) le principe thA©orique fondamental dA©rive d'une forte situation de non†arbitrage; 2) seuls les dividendes anticipA©s peuvent servir d'attribut de capitalisation (valeur actualisA©e) valide d'un titre sur le plan gA©nA©rique; 3) la notion de risque est gA©nA©rale, et les modA¨les tels que le modA¨le d'A©quilibre des marchA©s financiers ne se vA©rifient que dans des cas particuliers; 4) la notion de capitalisation des flux monA©taires plutA´t que des dividendes nA©cessite des hypothA¨ses supplA©mentaires (relativement rigoureuses); 5) la thA©orie existante des bA©nA©fices « purs » en situation d'incertitude manque d'unitA© en ce qui a trait au sens et aux caractA©ristiques de ces bA©nA©fices. L'auteur affirme que la revue qu'il a effectvA©e de travaux antA©rieurs l'amA¨ne A conclure qu'un seul concept de bA©nA©fices « purs » se justifie sur le plan A©conomique pour dA©terminer le produit d'un titre qui comprenne A la fois le prix et les dividendes.

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