Daily Link Orgy - June 22, 2009

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the third most downloaded paper related to a financial or investing topic.

A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation
Stephen H. Penman and Theodore Sougiannis - 37,934 downloads

Abstract

"Standard formulas for valuing the equity of going concerns require prediction of payoffs "to infinity" but practical analysis requires that they be predicted over finite horizons. This truncation inevitably involves (often troublesome) "terminal value" calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when applied to a finite-horizon valuation. Valuations based on average ex-post payoffs over various horizons, with and without terminal value calculations, are compared with (ex-ante) market prices to give an indication of the error introduced by each technique in truncating the horizon. Comparisons of these errors show that accrual earnings techniques dominate free cash flow and dividend discounting approaches. Further, the relevant accounting features of techniques that make them less than ideal for finite horizon analysis are discovered. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined."

Number 4.

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