14
Michael Smolyansky, “End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock
Returns,” Board of Governors of the Federal Reserve System Finance and Economics Discussion Series 2023-
041, June 2023.
15
Louis K.C. Chan, Jason Karceski, and Josef Lakonishok, “The Level and Persistence of Growth Rates,”
Journal of Finance, Vol. 58, No. 2, April 2003, 643-684.
16
For an illustration, see Mauboussin and Rappaport, Expectations Investing, 16-18.
17
Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, Sixth Edition (Boston, MA:
McGraw-Hill Higher Education, 2000), 947-949.
18
Mark D. Walker and Keven Yost, “Seasoned Equity Offerings: What Firms Say, Do, and How the Market
Reacts,” Journal of Corporate Finance, Vol. 14, No. 4, September 2008, 376-386.
19
Amy Dittmar and Laura Casares Field, “Can Managers Time the Market? Evidence Using Repurchase Price
Data,” Journal of Financial Economics, Vol. 115, No. 2, February 2015, 261-282 and Richard G. Sloan and
Haifeng You, “Wealth Transfers via Equity Transfers,” Journal of Financial Economics, Vol. 118, No. 1, October
2015, 93-112.
20
Michael J. Mauboussin and Dan Callahan, “Capital Allocation: Results, Analysis, and Assessment,” Consilient
Observer: Counterpoint Global Insights, December 15, 2022.
21
Alon Brav, John R. Graham, Campbell R. Harvey, and Roni Michaely, “Payout Policy in the 21st Century,”
Journal of Financial Economics, Vol. 77, No. 3, September 2005, 483-527.
22
Bruce Dravis, “Dilution, Disclosure, Equity Compensation, and Buybacks,” Business Lawyer, Vol. 74, No. 3,
Summer 2019, 631-658.
23
Itzhak Ben-David and Alexander M. Chinco, “Modeling Managers as EPS Maximizers,” NBER Working Paper
31125, June 2023.
24
John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, “The Economic Implications of Corporate
Financial Reporting,” Journal of Accounting and Economics, Vol. 40, Nos. 1-3, December 2005, 3-73.
25
Brav, Graham, Harvey, and Michaely, “Payout Policy in the 21st Century.”
26
Jacob Oded and Allen Michel, “Stock Repurchases and the EPS Enhancement Fallacy,” Financial Analysts
Journal, Vol. 64, No. 4, July-August 2008, 62-75.
27
Joel M. Stern, “Earnings per Share Don’t Count,” Financial Analysts Journal, Vol. 30, No. 4, July-August 1974,
39-40, 42-43, 67-75.
28
Mauboussin and Rappaport, Expectations Investing, 200-203.
29
Yueran Ma, “Nonfinancial Firms as Cross-Market Arbitrageurs,” Journal of Finance, Vol. 74, No. 6, December
2019, 3041-3087.
30
Kent Daniel and Sheridan Titman, “Another Look at Market Responses to Tangible and Intangible Information,”
Critical Finance Review, Vol. 5, No. 1, 2016, 165-175.
31
Enterprise value equals the market value of equity, plus debt and other liabilities, minus excess cash. See
Michael J. Mauboussin, “What Does an EV/EBITDA Multiple Mean?” BlueMountain Investment Research,
September 13, 2018.
32
Frank J. Fabozzi, Sergio M. Focardi, and Caroline Jonas, “Equity Valuation: Science, Art, or Craft?” CFA
Institute Research Foundation, 2017.
33
Merton H. Miller and Franco Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal of
Business, Vol. 34, No. 4, October 1961, 411-433.
34
Michael J. Mauboussin and Dan Callahan, “ROIC and the Investment Process: ROICs, How They Change,
and Shareholder Returns,” Consilient Observer: Counterpoint Global Insights, June 6, 2023.
35
For some businesses, assuming current earnings will persist is too optimistic and therefore the steady-state
P/E is too high. In these cases, you can use the Gordon Growth Model, E/(k-g), where E is earnings (a proxy for
distributable cash), k is the weighted average cost of capital, and g is the growth in perpetuity. Growth is negative
if the business is shrinking. As a result, you divide earnings by a higher denominator (subtracting a negative
number is equivalent to adding its positive counterpart), which lowers the value and fair P/E. For example, the
appropriate multiple is 6.7 times if the cost of capital is 10 percent and the growth is -5 percent (6.7 = 1/[.10 +
.05]).