Way back in 1934, Graham and Dodd observed the importance of earning power in investment theory. According to them, history of actual earning with a reasonable expectation should be approximated in future. The empirical study of Ball and Brown (1968) contends that of all the sources of information as regards the working of a firm during a year, income number reported in the annual income statement captures one-half or more. In the backdrop of relevance of accounting numbers for equity valuation, Feltham and Ohlson (1995) and Ohlson (1995) provide an objective valuation model based on abnormal earning. According to the models, the fundamental of valuation depends on abnormal earning—an autoregressive process of the first order [AR(1)] that is related to the abnormal earning of the previous period. Along with abnormal earning there may be other variables like book value of the equity, operating cash flow, accruals and other information (all of them being autoregressive, AR(1), processes) can be used severally and jointly for predicting equity value. In the present paper, an attempt has been made to test the forecasting ability of equity share value of CNX NIFTY companies of the National Stock Exchange of India empirically for a period of 10 years (1999-2008) by pooling cross-sectional data on abnormal earning, book value and operating cash flow in line with the forecasting and valuation equation models of Feltham and Ohlson (1995) and Ohlson (1995). The findings suggest that abnormal earning, book value and operating cash flow component of earning respectively follow an autoregressive process. Information on abnormal earning and book value aids in predicting equity value. The findings are consistent with Ohlson’s model.

In their classic work, Graham and Dodd (1934) observe that the concept of earning has a rich history in financial statement analysis. It combines a history of actual earning, shown over a period of years, with a reasonable expectation that these will be approximated in the future, unless extraordinary conditions supervene.

As a source of information for financial decision making, financial statement numbers and their interpretation play the most significant role in fundamental analysis.

The role of accounting numbers in the matter of valuation of a going concern was empirically brought out through a study by Ball and Brown (1968). In the said study the usefulness of accounting numbers was examined by the information content and timeliness. According to the study, of all the sources of information as regards the working of a firm during a year, income number reported in the annual income statement captures one-half or more. Hence, content of annual income statement is of considerable importance. But the annual income number performs poorly as a timely device of performance measure since 80-90% is captured by media promptly before the annual income becomes a source of information. The study observes that the media report perhaps includes number contained in interim reports. This is not unexpected. According to the Efficient Market Hypothesis (EMH), market readily impounds all available information including ‘pro-forma earning’ or unaudited figures of earning in interim reports published by the companies voluntarily or under statute (e.g., in India under listing agreement all listed companies are now mandated to publish quarterly earning figures).

Accounting Research and Audit Practices, Economic Performance, Millennium Development Goals, Corporate Sustainability, Economic Transactions, Social Management, Environmental Accounting, Corporate Houses, Environmental Management System, Community Development, Waste Management, German Firms, United Nations Environment Program.