First,the forecasting equation measures a predictive ability of cash flows, accruals, and net operating assets to one-year-ahead earnings using a linear regression. Next, the valuation equation measures the market pricing of cash flows, accruals, and net operating assets resulting in valuation parameters to be compared with the persistence parameters
estimated from the forecasting equation. If the market is efficient (i.e., there is no investor misperceptions.), the differences between the persistence parameters from the forecasting and the valuation equations will be insignificant