IIM K hosted its eleventh research seminar on January 04, 2024, for the year 2023-24. It was conducted by PROF. SURESH GOVINDARAJ, Professor and Director of the Ph.D. and DBA Programs, Rutgers University, USA. The topic was Valuation of Accruals and Investor Intertemporal Consumption-Investment Choices.
The abstract of the talk is given below.
The concept of accruals is arguably one of the mostimportant developments in the theory and practice of public accounting. Accruals have been shown to be bothinformative and value relevant for investors. However, prior literature has been unable to satisfactorily integrate accruals within the standard theory of financial economics. I attempt to fill this gap in the literature by developing a dynamic model of optimal consumption and investment decisions made by a risk averse (power utility) investor in a market with riskless borrowing, and a risky asset, where the
expected return of the risky asset is affected by a random accrual process that causes the investment opportunity set to become stochastic. Since the accrual process introduce additional risk that is not market driven (and consequently not spanned by traded securities), it becomes necessary to approach the problem from a utility maximization perspective in an incomplete market setting as opposed to the complete market setting that has been assumed in prior models in the literature. The key contributions of my paper are (i) providing a framework to integrate accruals within the current theory of financial markets and valuation theory; (ii) obtaining explicit solutions for the unsolved and more general case of consumption-investment decisions by a risk averse investor with a power utility function; and (iii) providing some potentially testable predictions.