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When capital follows profitability: Non-linear residual income dynamics
Authors
G.C. Biddle
P. Chen
G. Zhang
Publication date
1 January 2001
Publisher
Doi
Cite
Abstract
Economic reasoning suggests that capital follows profitability. This study introduces into residual income valuation "capital follows profitability" investment dynamics whereby capital investments are guided by the profitability of underlying investment opportunities. These investment dynamics predict convex versus linear relations between future and current residual income, with slope and convexity dependent on investment opportunity. We test these predictions against the linear information dynamics (LID) proposed by Ohlson (1995) and Feltham and Ohlson (1996), with supportive results. These findings point the way to further development of links between firm value and the economics of value creation. © 2001 Kluwer Academic Publishers
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Hong Kong University of Science and Technology Institutional Repository
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oai:repository.ust.hk:1783.1-2...
Last time updated on 14/05/2016
HKU Scholars Hub
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oai:hub.hku.hk:10722/129000
Last time updated on 01/06/2016
HKU Scholars Hub
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oai:hub.hku.hk:10722/193728
Last time updated on 01/06/2016