Review of Accounting Studies

, Volume 6, Issue 4, pp 397–425 | Cite as

A General Affine Earnings Valuation Model

  • Andrew Ang
  • Jun Liu


We introduce a methodology, with two applications, that incorporates stochastic interest rates, heteroskedasticity and risk aversion into the residual income model. In the first application, goodwill is an affine (constant plus linear term) function where the constant and linear coefficients are time-varying. Homoskedastic risk gives rise to a constant risk premium, while heteroskedastic risk gives rise to linear state-dependent risk premiums. In the second application, we present a class of models where a non-linear function for the price-to-book ratio can be derived. We show how interest rates, risk, profitability and growth affect the price-to-book ratio.

stock valuation earnings residual income model asset-pricing affine model linear information dynamics 


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Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  • Andrew Ang
    • 1
  • Jun Liu
    • 2
  1. 1.Columbia University and NBERNew York
  2. 2.Anderson School C509UCLAUCLA

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