The Equivalance of Dividend, Cash Flows and Residual Earnings Approaches to Equity Valuation Employing Ideal Terminal Value Expressions PDF Download
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Author: Lucie Courteau
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
Recently, Penman and Sougiannis (1998) and Francis, Olsson and Oswald (1999) compared the bias and accuracy of the dividend discount model (DDM), discounted cash flow model (DCF), and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non price-based terminal values, RIM outperforms DCF and DDM. Our primary research objective is to explore whether, over a five-year valuation horizon, DDM, DCF and RIM are empirically equivalent when Penman's (1998) theoretically quot;idealquot; terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these three price-based valuation models.Our secondary research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression will generate the lowest pricing errors, compared to models that employ non price-based terminal value under an arbitrary growth assumption. Results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non price-based models by a wide margin. We also revisit the issue of the apparent superiority of RIM, and find that this result does not hold in a level playing field where an approximation of ideal terminal values is employed. In fact, the price-based RIM model is marginally outperformed by the price-based DCF and DDM models, in terms of pricing errors as well as its ability to explain current market price.
Author: Lucie Courteau
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
Recently, Penman and Sougiannis (1998) and Francis, Olsson and Oswald (1999) compared the bias and accuracy of the dividend discount model (DDM), discounted cash flow model (DCF), and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non price-based terminal values, RIM outperforms DCF and DDM. Our primary research objective is to explore whether, over a five-year valuation horizon, DDM, DCF and RIM are empirically equivalent when Penman's (1998) theoretically quot;idealquot; terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these three price-based valuation models.Our secondary research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression will generate the lowest pricing errors, compared to models that employ non price-based terminal value under an arbitrary growth assumption. Results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non price-based models by a wide margin. We also revisit the issue of the apparent superiority of RIM, and find that this result does not hold in a level playing field where an approximation of ideal terminal values is employed. In fact, the price-based RIM model is marginally outperformed by the price-based DCF and DDM models, in terms of pricing errors as well as its ability to explain current market price.
Author: Lucie Courteau
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Recently, Penman and Sougiannis (1998) and Francis, Olsson and Oswald (1999) compared the bias and accuracy of the dividend discount model (DDM), discounted cash flow model (DCF), and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non price-based terminal values, RIM outperforms DCF and DDM. Our primary research objective is to explore whether, over a five-year valuation horizon, DDM, DCF and RIM are empirically equivalent when Penman's (1998) theoretically "ideal" terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these three price-based valuation models. Our secondary research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression will generate the lowest pricing errors, compared to models that employ non price-based terminal value under an arbitrary growth assumption. Results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non price-based models by a wide margin. We also revisit the issue of the apparent superiority of RIM, and find that this result does not hold in a level playing field where an approximation of ideal terminal values is employed. In fact, the price-based RIM model is marginally outperformed by the price-based DCF and DDM models, in terms of pricing errors as well as its ability to explain current market price.
Author:
Publisher:
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Category :
Languages : en
Pages :
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Book Description
Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital. -- Dirty Surplus ; Terminal Value ; Steady-State ; Valuation Error
Author: Stephanie Gross
Publisher: Springer Science & Business Media
ISBN: 3835092782
Category : Business & Economics
Languages : en
Pages : 297
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Book Description
Stephanie Gross focuses on three sets of questions on shareholder value of banks and analyses its measurement, empirical relevance and value drivers.
Author: Stephen H. Penman
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Standard formulas for valuing the equity of going concerns require prediction of payoffs "to infinity" but practical analysis requires that they be predicted over finite horizons. This truncation inevitably involves (often troublesome) "terminal value" calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when applied to a finite-horizon valuation. Valuations based on average ex-post payoffs over various horizons, with and without terminal value calculations, are compared with (ex-ante) market prices to give an indication of the error introduced by each technique in truncating the horizon. Comparisons of these errors show that accrual earnings techniques dominate free cash flow and dividend discounting approaches. Further, the relevant accounting features of techniques that make them less than ideal for finite horizon analysis are discovered. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined.
Author: Jerald E. Pinto
Publisher: John Wiley & Sons
ISBN: 1119628105
Category : Business & Economics
Languages : en
Pages : 720
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Book Description
Navigate equity investments and asset valuation with confidence Equity Asset Valuation, Fourth Edition blends theory and practice to paint an accurate, informative picture of the equity asset world. The most comprehensive resource on the market, this text supplements your studies for the third step in the three-level CFA certification program by integrating both accounting and finance concepts to explore a collection of valuation models and challenge you to determine which models are most appropriate for certain companies and circumstances. Detailed learning outcome statements help you navigate your way through the content, which covers a wide range of topics, including how an analyst approaches the equity valuation process, the basic DDM, the derivation of the required rate of return within the context of Markowitz and Sharpe's modern portfolio theory, and more.
Author: John D. Stowe
Publisher: John Wiley & Sons
ISBN: 0470052821
Category : Business & Economics
Languages : en
Pages : 338
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Book Description
"Here is an essential tool for the investor: clear, practical, insightful, and concise. This book should have a long, useful life in a professional's library." —Jeffrey P. Davis, CFA, Chief Investment Officer, Lee Munder Capital Group "This book provides a clear, comprehensive overview of equity valuation concepts and methods. It is well suited for finance practitioners who want to strengthen their understanding of equity asset valuation and as a supplemental reading in advanced undergraduate and graduate courses addressing security analysis and business valuation." —Professor Robert Parrino, CFA, PhD, Department of Finance, Red McCombs School of Business, The University of Texas at Austin "CFA Institute has done it again. This will be a 'must' reference book for anyone serious about the nuances of equity investment valuation." —Robert D. Arnott, Chairman, Research Affiliates "Equity Asset Valuation concisely and clearly explains the most widely used approaches to equity evaluation. In addition to thoroughly explaining the implementation of each valuation method, there is sophisticated discussion of the commonsense financial economics and accounting issues underlying the methods." —David Blackwell, Head and RepublicBank/James W. Aston Professor of Finance, Mays Business School, Texas A&M University
Author: Leonard C. Soffer
Publisher: Pearson
ISBN:
Category : Business & Economics
Languages : en
Pages : 484
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Book Description
For undergraduate/graduate courses in Financial Statement Analysis and Valuation. This text combines finance, accounting, and business strategy theory with enough real accounting information to teach students how to actually use financial statement data in valuation and analysis--as well as understand the corporate finance theory behind it.
Author: John Anthony Jeffrey Briginshaw
Publisher:
ISBN:
Category :
Languages : en
Pages : 256
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Book Description
Author: Stephen H. Penman
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
This paper lays out alternative equity valuation models that involve forecasting for finite periods and shows how they are related to each other. It contrasts dividend discounting models, discounted cash flow modes, and quot;residual incomequot; models based on accrual accounting. It shows that some models that are apparently different yield the same valuation. It gives the general form of the terminal value calculation in these models and shows how this calculation serves to correct errors in the model. It also shows that all models can be interpreted as providing a particular specification of the terminal value for the dividend discount model and in so doing provides the terminal value calculation for the dividend discount formula.
