The residual earnings model has had a long history. In the early part of the twentieth century, the idea that a firm’s value was based on “excess profits” was firmly established in the United Kingdom. The model is in the German literature of the 1920s and 1930s, particularly in the writings of Schmalenbach. In the U.S., Gabriel Preinreich, an accounting and valuation theorist associated with Columbia University in the 1930s and 1940s, wrote extensively on the model, including “The Fair Value and Yield of Common Stock,” The Accounting Review (1936), 130-140 and “Annual Survey of Economic Theory: The Theory of Depreciation,” Econometrica 6 (1938), 219-41. In a 1941 paper, Preinreich recognizes the model in a prize essay by a student, J. H. Bourne in Accountant, London, 22 September 1888, pp. 605-606 (as referenced by Prenireich). That’s a long time ago!
Strangely, the model was ignored for many years. John Burr William’s The Theory of Investment Value (Harvard University Press, 1938) promoted dividends as the fundamental for equity valuation, and academics have followed that tradition. U.S. texts have modified the dividend discount model to focus on free cash flows within the firm rather than cash flows to shareholders (dividends), and discounted cash flow analysis was the premier valuation technique in investment houses for many years (less so in Europe).
More recent expositions of the residual earnings model are in Edwards, E. and Bell, P., The Theory and Measurement of Business Income (Berkeley: University of California Press, 1961), 48-54 and 66-69; Ken Peasnell, Some Formal Connections Between Economic Values and Yields and Accounting Numbers, Journal of Business Finance and Accounting (1982), 361-381; James Ohlson, Earnings, Book Value, and Dividends in Equity Valuation, Contemporary Accounting Research (1995), 661-687.
The residual earnings model features prominently in modern texts on financial statement analysis and valuation (less so in finance investment texts that stick to cash flow valuation). See, for example, Easton, McAnally, Crawford, and Sommers, Financial Statement Analysis and Valuation, 7th ed. (Chicago: Cambridge Publishers, 2025). Clyde Stickney, Paul Brown, and James Wahlen, Financial Reporting, Financial Analysis, and Valuation: A Strategic Perspective (Southwestern Publishing); Stephen H. Penman, Financial Statement Analysis and Security Valuation, 5th ed. (New York, McGraw-Hill Irwin, 2013) Stephen Penman, Accounting for Value (New York: Columbia University Press, 2011; James English, Applied Equity Analysis (New York: McGraw-Hill, 2001).
For alternative formulations of the residual earnings model and a comparison to other models, including the dividend discount model, see Stephen Penman, A Synthesis of Equity Valuation Techniques and the Terminal Value Calculation for the Dividend Discount Model, Review of Accounting Studies 2 (1997), 303-323.