Introductory description

This is an elective module available for WBS and Non-WBS students.

The main objective of the module is to provide students with the tools to analyse firm financial performance from an equity valuation perspective and to carry out a business valuation building on this analysis. A further objective is to encourage students to use the valuation-based framework to analyse the ‘quality’ of accounting information and to explore empirical studies concerned with testing the value-relevance of financial statement information.

Module web page

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

1. Accounting and cash flow valuation model.
2. Financial analysts’ use of financial statements: practice and evidence.
3. Reformulation of financial statements and value-based ratio analysis.
4. Implementation of accounting valuation models.
5. Accounting quality and the value relevance of accounting information.

Learning outcomes

By the end of the module, students should be able to:

• Understand and apply business valuation models that use accounting numbers.
• Gain an understanding of the importance of ratio analysis to investors and analysts and learn how to apply a value based approach to ratio analysis.
• Develop the ability to prepare a thorough valuation analysis including sensitivity analysis on the key assumptions.
• Understand the factors determining quality of accounting information from an investor perspective and gain a basic understanding of empirical research on value relevance.
• Develop ability to apply and integrate concepts from accounting and finance to the analysis of business plans and company valuation.

Indicative reading list

Financial Statement Analysis and Security Valuation 5th edition by Stephen H. Penman (2013).
Additional readings:
Healy, P. and Palepu, K. (2003) 'How the Quest for Efficiency Corroded the Market' Harvard Business Review, 81, 7, pp. 76-85
Penman, S. (2003) 'The Quality of Financial Statements: Perspectives from the Recent Stock Market Bubble' Accounting Horizons, 17, Supplement, pp. 77-96
Cascino, S.; Clatworthy, M.; Osma, B.; Gassen, J.; Imam, S. and Jeanjean, T. (2014) 'Who Uses Financial Reports and for What Purposes? Evidence from Capital Providers' Accounting in Europe, 11, 2, pp. 185-209
Barker, R. (2010). 'The operating-financing distinction in financial reporting', Accounting and Business Research, 40 (4) pp. 391-403.
Penman, S. (2014) 'Financial Ratios and Equity Valuation' in Cooper, C.L. (ed.) Wiley Encyclopedia of Management: Accounting Volume Chichester:John Riley & Sons
Penman, S and Nissim, D. (2001). Ratio analysis and equity valuation: from research to practice. Review of Accounting Studies, March: 109-154.
Fairfield, P and Yohn, T. (2001). Using asset turnover and profit margin to forecast changes in profitability. Review of Accounting Studies 6: 361-375.
Penman, S. (2006) 'Handling Valuation Models' Journal of Applied Corporate Finance, 18, 2, pp. 48-55.
Lee, C. (2003) 'Choosing the Right Valuation Approach' in Larrabee, D.T. and Vodd, J.A (eds), Valuation Techniques Hoboken, NJ: John Wiley & Sons, pp. 243-58.
Imam, S.; Chan, J. and Shah, Z. (2013) 'Equity Valuation Models and Target Price Accuracy in Europe: Evidence from Equity Reports' International Review of Financial Analysis, 28, pp. 9-19.
Penman, S. (2016). 'Valuation: The State of the Art' Schmalenbach Business Review 17, 1, pp. 3-23.
Cascino, S., Clatworthy, M., Osma, B., Gassen, J. Imam, S. (2021) The usefulness of financial accounting information: Evidence from the field. Forthcoming at the Accounting Review. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3008083.
Penman, S. (2009) 'Accounting for intangible assets: there is also an income statement' Abacus, 45, 3, pp. 358-71.
Cornell, B. and Landsman, W.R. (2003) 'Accounting Valuation: Is Earnings Quality an Issue?' Financial Analysts Journal, 59, 6, pp. 20-8.
Dichev, I.; Graham, J.: Harvey, C. R. and Rajgopal, S. (2013) 'The Misrepresentation of Earnings' Financial Analysts Journal, 72, 1, pp. 22-35.
Imam, S. Barker, R, Clubb, C. 2008. 'The use of valuation models by UK investment analysts', European Accounting Review, 17 (3), pp. 503-535.
Imam, S. and Spence, C. (2015) 'Context, not Predictions: A Field Study of Financial Analysts' Accounting, Auditing and Accountability Journal, 29, 2 pp. 226-47.
Spence, C., Aleksanyan, M., Millo, Y., Imam, S., and Abhayawansa, S. (2019). Earning the 'write to speak': sell-side analysts and their struggle to be heard. Contemporary Accounting Research, 36, 4, 2635-2662.

Subject specific skills

Develop an understanding of how financial statements analysis can be linked to fundamental analysis.

Transferable skills

Demonstrate oral and written communication skills in relation to the analysis of company financial statement information from a valuation perspective.
Develop and apply modelling and spreadsheet skills to the solution of performance analysis and valuation problems.