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1
Cheng, Qiang. "What Determines Residual Income?" Accounting Review 80, no. 1 (January 1, 2005): 85–112. http://dx.doi.org/10.2308/accr.2005.80.1.85.
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This paper investigates the determinants of residual income scaled by book value of equity, i.e., abnormal return on equity (ROE), by analyzing the impact of value-creation (economic rents) and value-recording (conservative accounting) processes on abnormal ROE. I rely on economic theories to characterize economic rents and develop an empirical measure—the conservative accounting factor—to capture the effect of conservative accounting. As expected, industry abnormal ROE increases with industry concentration, industry-level barriers to entry, and industry conservative accounting factors. Also as expected, the difference between firm and industry abnormal ROE increases with market share, firm size, firm-level barriers to entry, and firm conservative accounting factors. Integrating these determinants into the residual income valuation model significantly increases its explanatory power for the variation in the market-to-book ratio.
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Higgins, Huong N. "Forecasting stock price with the residual income model." Review of Quantitative Finance and Accounting 36, no. 4 (June 23, 2010): 583–604. http://dx.doi.org/10.1007/s11156-010-0187-y.
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Dechow, Patricia M., Amy P. Hutton, and Richard G. Sloan. "An empirical assessment of the residual income valuation model." Journal of Accounting and Economics 26, no. 1-3 (January 1999): 1–34. http://dx.doi.org/10.1016/s0165-4101(98)00049-4.
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Kjærland, Frode. "Simple valuation of electric utilities – a comparison of the residual income model and a real options approach." Investment Management and Financial Innovations 13, no. 2 (June 3, 2016): 53–64. http://dx.doi.org/10.21511/imfi.13(2).2016.06.
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Since deregulation of the energy market in Norway, there has been a number of mergers and acquisitions of electric utilities. In all these transactions, the companies have been valued. Many of the transactions have sparked significant controversy (by politicians, consultants and others) who claim that the companies have been sold too cheaply, especially concerning hydropower generating companies. How can business valuation of these enterprises be explained? Real option theory is, in this study, applied in order to explain the value beyond a traditional approach. The residual income model proposed by Feltham and Ohlson (1995) is considered. The empirical analysis shows that an enhancement in explanatory power of 100% is brought about through the introduction of independent variables based on real option theory. This supports the use of real options in helping to explain values in this industry
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Myers, James N. "Implementing Residual Income Valuation With Linear Information Dynamics." Accounting Review 74, no. 1 (January 1, 1999): 1–28. http://dx.doi.org/10.2308/accr.1999.74.1.1.
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Residual income (RI) valuation is a method of estimating firm value based on expected future accounting numbers. This study documents the necessity of using linear information models (LIMs) of the time series of accounting numbers in valuation. I find that recent studies that make ad hoc modifications to the LIMs contain internal inconsistencies and violate the no arbitrage assumption. I outline a method for modifying the LIMs while preserving internal consistency. I also find that when estimated as a time series, the LIMs of Ohlson (1995), and Feltham and Ohlson (1995) provide value estimates no better than book value alone. By comparing the implied price coefficients to coefficients from a price level regression, I find that the models imply inefficient weightings on the accounting numbers. Furthermore, the median conservatism parameter of Feltham and Ohlson (1995) is significantly negative, contrary to the model's prediction, for even the most conservative firms. To explain these failures, I estimate a LIM from a more carefully modeled accounting system that provides two parameters of conservatism (the income parameter and the book value parameter). However, this model also fails to capture the true stochastic relationship among accounting variables. More complex models tend to provide noisier estimates of firm value than more parsimonious models.
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Hong, Kim, and Fakhruddin Nasution. "PENILAIAN HARGA SAHAM PERUSAHAAN PEMBIAYAAN DI BURSA EFEK INDONESIA." Media Riset Akuntansi, Auditing dan Informasi 12, no. 1 (April 8, 2012): 87. http://dx.doi.org/10.25105/mraai.v12i1.589.
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<span>The purpose of multi finance companies’ stock price valuation is to know their intrinsic <span>values by performing fundamental analysis using dividend discount model, free cash flow to the firm model, free cash flow to equity model, and residual income model. Research data uses secondary data in the period of 2006-2010 which consists of Indonesian Stock Price Composite Index (IHSG), and multi finance companies’ stock prices taken from Yahoo Finance; multi finance companies’ financial statements taken from Indonesian Stock Exchange (BEI) reports; multi finance industry data taken from Bapepam-LK. As a result of research, stock of ADMF is fair valued by using the analysis of dividend<br />discount model; undervalued by using the analysis of free cash flow to the firm and free cash flow to equity models; overvalued by using the analysis of residual income model. Stock of BFIN is undervalued by using the analysis of dividend discount, free cash flow to the firm, and free cash flow to equity models; overvalued by using the analysis of residual income model. Stock of MFIN is overvalued by using the analysis of dividend discount<br />and residual income models; undervalued by using the analysis of free cash flow to the firm and free cash flow to equity models. Statistic t-test shows that there are no significant differences to value stock prices using dividend discount, free cash flow to the firm, free cash flow to equity, and residual income models, therefore investment analyst or investor may use one of the chosen stock price valuation model.<br />Keywords: Multi finance companies, Fundamental analysis, Stock price valuation model, Intrinsic value, Required return, Investment risk<br /></span></span>
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Lopes, Alexsandro Broedel. "Valuation properties of accounting numbers in Brazil." Corporate Ownership and Control 1, no. 3 (2004): 31–36. http://dx.doi.org/10.22495/cocv1i3p3.
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This work investigates the valuation properties of accounting numbers in Brazil under three traditional frameworks: earnings capitalization, book value of equity and residual income. The sample was selected from companies traded at the São Paulo Stock Exchange (BOVESPA) from 1995 to 1999, dividing the sample in two groups: companies with preferred and with common shares. My results show that the earnings capitalization model did not perform well for common shares and have a better performance for preferred shares because of the mandatory dividend distribution as a percentage of net income in Brazil and because earnings have no use as information asymmetry reducers in Brazil. The book value model performed better for common shares while residual income had a comparable performance and seems to be the dominant accounting-based valuation model for common shares. For preferred shares the residual income model performs better. The residual income term alone presents no significant difference for the two sets of companies. For both set of companies accounting income did not incorporated economic income.
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Wang, Lixia, and Lining Gan. "Theoretical and Empirical Analysis of Market-Power Adjusted RIM Model." International Journal of Economics and Finance 8, no. 2 (January 24, 2016): 147. http://dx.doi.org/10.5539/ijef.v8n2p147.
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The market power of firms can take an important effect on their value through the influence of residual incomes. Based on Ohlson’s residual income model (RIM model, also called EBO model), the paper puts financial account—unearned revenue to build the new model, market-power adjusted RIM model. Then we make empirical analysis using the data from 2003 to 2011 year in China capital market. The empirical evidence proofs that unearned revenue has an obvious effect on the value of firms. The result shows that the new model has important complementary role to evaluate the firms’ value in China capital market.
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Johnson, Nicole Bastian. "Residual Income Compensation Plans and Deferred Taxes." Journal of Management Accounting Research 22, no. 1 (January 1, 2010): 103–14. http://dx.doi.org/10.2308/jmar.2010.22.1.103.
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ABSTRACT: Residual income is a popular performance metric that is often calculated from financial accounting numbers. Practitioners argue that financial accounting earnings and book value suffer from various biases and should be adjusted prior to the residual income calculation so that the resulting residual income metric will have better incentive properties, but they often disagree about what the adjustments should be. Using the criterion that a residual income performance metric should align owner and managerial investment incentives, I develop a simple investment model to show how financial accounting choices and adjustments must be chosen jointly to achieve incentive alignment. In particular, I examine conflicting recommendations from the practitioner literature about the proper adjustment for deferred taxes and show that more than one adjustment method can achieve incentive alignment if paired with the correct depreciation schedule. Further, I show that relationships among accounting variables introduce constraints that make some policies or adjustments more difficult to work with. The paper concludes with a brief discussion about how the use of sub-optimal adjustments can negatively influence the manager’s investment incentives.
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Baginski, Stephen P., and James M. Wahlen. "Residual Income Risk, Intrinsic Values, and Share Prices." Accounting Review 78, no. 1 (January 1, 2003): 327–51. http://dx.doi.org/10.2308/accr.2003.78.1.327.
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Empirical accounting research provides surprisingly little evidence on whether accounting earnings numbers capture cross-sectional differences in risk that are associated with cross-sectional differences in share prices. We address two questions regarding the risk-relevance of accounting numbers: (1) Are accounting-related risk measures (i.e., the systematic risk and total volatility in a firm's time-series of residual return on equity) associated with the market's assessment and pricing of equity risk? (2) If so, then are these accounting-related risk measures incrementally associated with the market's assessment and pricing of equity risk beyond other observable factors, such as those in the Fama and French (1992) three-factor model? We develop an accounting-fundamentals-based measure of the market's pricing of risk—the difference between actual share price and a residual income valuation model estimate of share value using risk-free rates of return. Our results show that both systematic risk and total volatility in residual return on equity partially explain this pricing differential, and that the explanatory power of total volatility is incremental to the Fama and French (1992) factors—market beta, firm size, and the market-to-book ratio.
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Beaver, William H. "Comments on `An empirical assessment of the residual income valuation model'." Journal of Accounting and Economics 26, no. 1-3 (January 1999): 35–42. http://dx.doi.org/10.1016/s0165-4101(98)00042-1.
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Sato, Kiyokazu. "Stock Valuation of Internet Company based on Residual Income Option Model." Communications of the Japan Association of Real Options and Strategy 8, no. 3 (2016): 21–32. http://dx.doi.org/10.12949/cjaros.8.3_21.
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Vergos, Konstantinos, Apostolos G. Christopoulos, and Vasilios Kalogirou. "Macroeconomic Factors and Company Value in the Context of the Ohlson Residual Income Valuation Model." International Journal of Sustainable Economies Management 2, no. 2 (April 2013): 1–11. http://dx.doi.org/10.4018/ijsem.2013040101.
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Over the past decades the Ohlson Residual Income Model for equity valuation has drawn much attention concerning its advantages when compared to traditional models (DDM, FCFM). This paper attempts to empirically investigate the validity of the Ohlson Residual Income model using data from the Greek economy over the period 1969-2001. By using multiple regression analysis and by incorporating macroeconomic factors as explanatory variables, we investigate the link of accounting and macroeconomic factors in the market valuation of major Greek companies listed in the Athens Stock exchange. We find that the performance of the Ohlson Residual Income Model is quite satisfactory and the use of factors such as commodity prices, discount rates, and market level in some cases add to the explanatory power of the examined model. Our findings are important for both economists and fund managers, because they show that a relation between accounting and macroeconomic data is valid in the Greek market and economy, alongside more developed markets.
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Ali Tareq, Mohammad. "‘Is Residual Income Model (RIM) REALLY Superior to Dividend Discount Model (DDM)?’ – A Misconception." IOSR Journal of Business and Management 5, no. 6 (2012): 36–44. http://dx.doi.org/10.9790/487x-0563644.
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Lundholm, Russell, and Terry O'Keefe. "Reconciling Value Estimates from the Discounted Cash Flow Model and the Residual Income Model*." Contemporary Accounting Research 18, no. 2 (June 2001): 311–35. http://dx.doi.org/10.1506/w13b-k4bt-455n-ttr2.
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Wu, Li Ming, and Xiao Yue Guo. "An Evaluation Model of Inundated Land Based on Income Approach - Residual Method." Applied Mechanics and Materials 209-211 (October 2012): 1627–30. http://dx.doi.org/10.4028/www.scientific.net/amm.209-211.1627.
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On discussing the value of inundated land the paper points out the problems of existing land evaluation methods and analyses the factors affecting land evaluation as well as discusses the principle of land value assessment. On this basis, the paper put forwards a model based on income approach -- residual method to reflect the true market value of the inundated land.
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Soffer, Leonard C. "Expected Long‐Run Return on Equity in a Residual Income Valuation Model." Review of Accounting and Finance 2, no. 1 (January 2003): 59–72. http://dx.doi.org/10.1108/eb027001.
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Lai, Cheng. "Growth in residual income, short and long term, in the OJ model." Review of Accounting Studies 20, no. 4 (April 11, 2015): 1287–96. http://dx.doi.org/10.1007/s11142-015-9320-4.
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Yee, Kenton K. "Opportunities Knocking: Residual Income Valuation of an Adaptive Firm." Journal of Accounting, Auditing & Finance 15, no. 3 (July 2000): 225–66. http://dx.doi.org/10.1177/0148558x0001500303.
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Maintaining a competitive edge requires a firm to replace deteriorating business lines with new projects. Accordingly, part of a firm's value resides in its ability to exploit new opportunities. This paper incorporates adaptation into Ohlson's residual income valuation framework and obtains an adaptation-adjusted valuation formula. Although parsimoniously cast, the model makes two predictions that are consistent with phenomena reported in the empirical literature: earnings convexity and complementarity. Moreover, the Appendix introduces an Equivalence Theorem relating Modigliani-Miller dividend invariance, complementarity, and convexity.
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Ho, Kung-Cheng, Shih-Cheng Lee, Chien-Ting Lin, and Min-Teh Yu. "A Comparative Analysis of Accounting-Based Valuation Models." Journal of Accounting, Auditing & Finance 32, no. 4 (January 28, 2016): 561–75. http://dx.doi.org/10.1177/0148558x15623043.
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We empirically compare the reliability of the dividend (DIV) model, the residual income valuation (CT, GLS) model, and the abnormal earnings growth (OJ) model. We find that valuation estimates from the OJ model are generally more reliable than those from the other three models, because the residual income valuation model anchored by book value gets off to a poor start when compared with the OJ model led by capitalized next-year earnings. We adopt a 34-year sample covering from 1985 to 2013 to compare the reliability of valuation estimates via their means of absolute pricing errors ( MAPE) and corresponding t statistics. We further use the switching regression of Barrios and Blanco to show that the average probability of OJ valuation estimates is greater in explaining stock prices than the DIV, CT, and GLS models. In addition, our finding that the OJ model yields more reliable estimates is robust to analysts-based and model-based earnings measures.
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Jiang, Xiaoquan, and Bon‐Soo Lee. "An Empirical Test of the Accounting‐Based Residual Income Model and the Traditional Dividend Discount Model." Journal of Business 78, no. 4 (July 2005): 1465–504. http://dx.doi.org/10.1086/430866.
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Gounder, Chitra Gunshekhar, and M. Venkateshwarlu. "Bank Valuation Models – A Comparative Analysis." Accounting and Finance Research 6, no. 3 (August 8, 2017): 116. http://dx.doi.org/10.5430/afr.v6n3p116.
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The Bank valuation model was designed based on objective to fit the most applicable valuation model for banks to help in forecasting bank specific decision and also forecast the market value of share. First study the accuracy and explanatory value of the value estimates from the residual income model compared to the estimates from the Relative valuation model for banks. Empirical evidence suggests that the residual income model is superior to the relative valuation model when it comes to measuring bank shareholder value. The results of the comparison suggest that value estimates from the residual income model are even more reliable for banks. On this basis, we conclude that residual income is an appropriate value estimate for the shareholder value of banks. There was positive significant relationship identified between the intrinsic value of bank share determined by RIV model and Market price of share in all the cases by performing correlation and Regression study. This study will be useful for forecasting the possible changes in market price. It was identified that determinants vary as per the working and regulatory condition as determinants impacting private, public and Indian banks were not similar so panel regression model will vary for each cases. It was also identified that Public Sector Bank in India shows more positive progressive trend as compared to private Sector Bank even after the fact that public Sector Bank has higher regulatory restriction as compared to Private Sector banks. This research will serve very useful for the banker to plan and take decision regarding shareholder value creation by implementing proper valuation model for getting appropriate value estimate and also adopting proper internal performance measure for having accurate and regular check on the process of value creation.
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Karminsky, A., and E. Frolova. "Methods of Bank Valuation in the Age of Globalization." MGIMO Review of International Relations, no. 3(42) (June 28, 2015): 173–83. http://dx.doi.org/10.24833/2071-8160-2015-3-42-173-183.
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This paper reviews the theory ofvalue-based management at the commercial bank and the main valuation methods in the age of globalization. The paper identifies five main factors that significantly influence valuation models selection and building: funding, liquidity, risks, exogenous factors and the capital cushion. It is shown that valuation models can be classified depending on underlying cash flows. Particular attention is paid to models based on potentially available cash flows (Discounted cash flow-oriented approaches, DCF) and models based on residual income flows (Residual income-oriented approaches). In addition, we consider an alternative approach based on comparison with same sector banks (based on multiples). For bank valuation equity discounted сash flow method is recommended (Equity DCF). Equity DCF values equity value of a bank directly by discounting cash flows to equity at the cost of equity (Capital Asset Pricing Model, CAPM), rather than at the weighted average cost of capital (WACC). For the purposes of operational management residual income-oriented approaches are recommended for use, because they are better aligned with the process of internal planning and forecasting in banks. For strategic management residual income-oriented methods most useful when expected cash flows are negative throughout the forecast period. Discounted сash flow-oriented approaches are preferable when expected cash flows have positive values and needs for models using is motivated by supporting the investment decisions. Proposed classification can be developed in interests of bank management tasks in the midterm in the age of globalization.
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Heathcote, Jonathan, Kjetil Storesletten, and Giovanni L. Violante. "How Should Tax Progressivity Respond to Rising Income Inequality?" Journal of the European Economic Association 18, no. 6 (October 30, 2020): 2715–54. http://dx.doi.org/10.1093/jeea/jvaa050.
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Abstract We address the question in the title in a heterogeneous-agent incomplete-market model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to being log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the United States, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription.
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Halsey, Robert F. "Using the Residual-Income Stock Price Valuation Model to Teach and Learn Ratio Analysis." Issues in Accounting Education 16, no. 2 (May 1, 2001): 257–72. http://dx.doi.org/10.2308/iace.2001.16.2.257.
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This article provides an overview of the residual-income stock price valuation model and demonstrates its use in interpreting the DuPont return on equity (ROE) decomposition. The model provides theoretical support for the DuPont model's focus on ROE and aids in understanding the implications of the price-to-book and price-earnings ratios. I conclude with an application of the model in the valuation of Nordstrom, Inc.
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Ashbaugh, Hollis, and Per Olsson. "An Exploratory Study of the Valuation Properties of Cross-Listed Firms' IAS and U.S. GAAP Earnings and Book Values." Accounting Review 77, no. 1 (January 1, 2002): 107–26. http://dx.doi.org/10.2308/accr.2002.77.1.107.
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Despite the increasing integration of global capital markets, there is little evidence on the valuation properties of cross-listed, non-U.S. firms' accounting variables. We use the relative performance of the earnings capitalization, the book value, and the residual income valuation models to explore the valuation properties of International Accounting Standards and U.S. Generally Accepted Accounting Principles earnings and book values reported by non-U.S., cross-listed firms trading in a common equity market. Using non-U.S./non-U.K. firms whose shares trade on the International Stock Exchange Automated Quotation system in London, we find that the earnings capitalization model is the dominant accounting-based valuation model when crosslisted firms report under International Accounting Standards. In contrast, we find that when cross-listed firms report under U.S. Generally Accepted Accounting Principles, the residual income model is the dominant accountingbased valuation model. Our exploratory study provides insights into the valuation implications of allowing a dual reporting system for foreign registrants trading in a common equity market.
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Bradshaw, Mark T. "How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?" Accounting Review 79, no. 1 (January 1, 2004): 25–50. http://dx.doi.org/10.2308/accr.2004.79.1.25.
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This paper examines whether valuation estimates based on analysts' earnings forecasts are consistent with their stock recommendations. Because earnings forecasts are linked to value and recommendations reflect analysts' opinions of value relative to current price, earnings forecasts and stock recommendations should be linked in a predictable manner. I consider four possible valuation models of how earnings forecasts and stock recommendations are linked. These models include two specifications of the residual income model, a price-earnings-to-growth (PEG) model, and analysts' projections of long-term earnings growth. The results provide little evidence that analysts' recommendations are explained by either residual income model specification. However, both the PEG model and analysts' projections of long-term earnings growth explain analysts' stock recommendations. The relation between the valuation models and future returns is also examined. Analysts' projections of long-term earnings growth have the greatest explanatory power for stock recommendations, but investment strategies based on these projections have the least association with future excess returns. Overall, the evidence suggests that analysts' recommendations are more correlated with heuristic valuation models than with present value models, and buy-and-hold investors would earn higher returns relying on present value models that incorporate analysts' earnings forecasts than on analysts' recommendations.
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Ritter, Moritz. "INEQUALITY AND INTERNATIONAL TRADE: THE ROLE OF SKILL-BIASED TECHNOLOGY AND SEARCH FRICTIONS." Macroeconomic Dynamics 21, no. 3 (January 6, 2016): 624–43. http://dx.doi.org/10.1017/s1365100515000620.
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I embed a competitive search model of the labor market into a small open economy model with heterogeneous firms and workers. Search frictions generate equilibrium unemployment and income inequality between identical workers, in addition to income differences between skill groups. A quantitative evaluation of the U.S. trade experience suggests that the effect of the increase in goods trade since 1980 may have contributed to the increase in the college premium, but not to the increase in residual inequality.
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Azzharah, Shinta Disky. "Influence of bankruptcy prediction and residual income on company share prices in various industry sectors." Indonesian Journal of Islamic Economics Research 1, no. 2 (November 26, 2019): 74–83. http://dx.doi.org/10.18326/ijier.v1i2.3126.
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Research use the panel data regression analysis model aims to determine the predictions of bankruptcy with the Altman Z-Score model and residual income influence the stock prices of companies listed in the Indonesian Syariah Stock Index (ISSI) in the period 2014 to 2018. Research This is a quantitative study using secondary data in the form of annual financial statements published by companies, with sampling using purposive sampling to obtain a sample of 23 manufacturing companies engaged in various industrial sectors. The research method uses the fixed effect model approach. The analysis said that the bankruptcy prediction using the Altman Z-Score model showed a significant negative effect on stock prices, while residual income had no effect on stock prices. In addition, the Altman Z-Score shows that many companies enter the gray area cut-off point and even go bankrupt, thus making shareholders reduce their share prices for the safety of their shares in the capital market.
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Taylor, Gary K., William D. Samson, and Benton Gup. "Questrom vs. Federated Department Stores, Inc: A Question of Equity Value." Issues in Accounting Education 16, no. 2 (May 1, 2001): 223–56. http://dx.doi.org/10.2308/iace.2001.16.2.223.
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This case is based on a factual situation facing the courts. Allen Questrom, recently retired Chief Executive Officer (CEO) of Federated Department Stores, is suing the company for the amount of incentive compensation he earned during the five years he was Federated's CEO. This incentive compensation was to be based on the increase in the firm's total equity value over this five-year period, a time during which Questrom rescued the retailer from bankruptcy. Questrom and Federated are in dispute over Federated's equity value as of January 28, 1995. Therefore, the court is being asked to estimate Federated's equity value as of January 28, 1995 and then determine the amount of compensation that Federated owes Questrom. The presiding judge (Gilbert Snider) wants you to analyze selected information from Federated's financial statements. As part of your analysis, the judge has asked you to explain the role that certain components of the financial statements have with respect to firm valuation. You are asked to estimate Federated's total equity value as of January 28, 1995 (the end of the five-year period under consideration) using the “free cash flow” and the “residual income” valuation models. The “residual income” model, which combines historical financial accounting and earnings forecasts to value companies, has generated considerable excitement in financial accounting academic circles and among accounting and consulting practitioners. Variants of the residual income valuation model, such as Stern and Stewart's EVA® (Economic Value-Added) and McKinsey's Economic Profit Model, have been widely discussed by academics and utilized by consultants to value businesses in a variety of settings and purposes.
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Cziglerné Erb, Edina. "The Re-emergence of the Residual Income Model in the Valuation of Firms and Investment Projects." Pénzügyi Szemle = Public Finance Quarterly 65, no. 3 (2020): 430–42. http://dx.doi.org/10.35551/pfq_2020_3_7.
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Liu, Min Shirley. "A PROPOSED ARCHIVAL EMPIRICAL RESEARCH METHODOLOGY TO TEST RELIABITIY AND VALIDITY OF DISCOUNTED RESIDUAL INCOME MODEL." International Journal of Accounting & Finance Review 6, no. 2 (April 6, 2021): 49–59. http://dx.doi.org/10.46281/ijafr.v6i2.1062.
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Kerlinger and Lee (2000) defines reliability as “the proportion of the ‘true’ variance to the total obtained variance of the data yielded by a measuring instrument” and content validity as “representativeness or sampling adequacy of the content—the substance, the matter, the topic of measuring instrument”. The goal of this research is to provide an empirical research method to quantify the reliability and validity of residual income model in the prediction of the value of equity (stock price), by proposing to compare all active U.S. firms from 1981 to 2005 traded in the NYSE and the AMEX (the time period and listed stocks are subject to change based upon the availability of data from different sources).
JEL Classification Codes: G10, G17, M41, Z10.
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Moyo, Vusani, and Fidelis Mache. "Inferring The Cost Of Equity: Does The CAPM Consistently Outperform The Income And Multiples Valuation Models?" Journal of Applied Business Research (JABR) 34, no. 3 (May 7, 2018): 519–32. http://dx.doi.org/10.19030/jabr.v34i3.10174.
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A number of surveys reveal that a large number of analysts, valuation experts, investors, chief financial officers and finance academics employ the capital asset pricing model (CAPM) of Sharpe (1962) and Lintner (1965) to estimate the cost of equity. There are, however, a number of alternative valuation models that can be used to infer the cost of equity. These alternative equity valuation models include the constant growth dividend discount, the earnings and book market multiples, the residual income and the Ohlson and Juettner-Nauroth (2005) abnormal earnings growth (AEG) models. Using four mature retail firms listed on the Johannesburg Stock Exchange, this paper tested for the equivalence of these models to the CAPM in estimating the cost of equity. The study found that the variants of the constant growth dividend discount and the AEG models give similar estimates which are closer to those of the CAPM. The variants of the price-to-earnings market multiples, price-to-book market multiples, and residual income models all yield estimates that are higher than those of the CAPM. Finally, the estimates seem to be affected by the stability of the firm’s earnings and financial position.
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Doukas, John A., and Wenjia Zhang. "Do equity mispricing and management compensation incentives drive bank mergers?" Review of Behavioral Finance 7, no. 1 (June 8, 2015): 2–41. http://dx.doi.org/10.1108/rbf-05-2013-0021.
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Purpose – The purpose of this paper is to test whether bank mergers are driven by equity overvaluation and management compensation incentives. Design/methodology/approach – To test whether equity mispricing drive bank mergers, the authors employ two alternative price-to-residual income valuation (P/V) measures for bidders and targets while the authors control for their growth prospects with the price-to-book (P/B) (two years before) ratio. The intrinsic value (V) is estimated using the three-period forecast horizon residual income model of Ohlson (1995) and perpetual residual income model that does not rely on analysts’ forecasts of future earnings prospects. The latter measure allows the authors to estimate V for a much larger sample of banks. The empirical analysis is supplemented with a standard event analysis and assessment of the long-term performance of bank mergers subsequent to the announcement date. Findings – The evidence shows that bidders are overvalued relative to their targets, especially in equity offer deals. The authors also find that highly valued bidders: are more likely to use stock than cash; are willing to pay more relative to the target market price; are more likely to acquire private than public targets; earn lower announcement-period returns; fail to create synergy gains; experience long-term underperformance; and reward their top managers of with large compensation increases subsequent to mergers. Originality/value – This study provides results consistent with the view that behavioral and managerial incentives play an important role in motivating bank mergers.
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Su, Peng, Xiaochun Jiang, Chengbo Yang, Ting Wang, and Xing Feng. "Insufficient Consumption Demand of Chinese Urban Residents: An Explanation of the Consumption Structure Effect from Income Distribution Change." Sustainability 11, no. 4 (February 14, 2019): 984. http://dx.doi.org/10.3390/su11040984.
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China’s consumption rate has continued to decline since 2000, which has retarded the sustainable growth of China’s economy. The dramatic changes in China’s income distribution have been very significant social characteristics, and they are also a very important factor for consumption. Therefore, this study analyzes the problem of insufficient domestic demand from the perspective of the effects of the income distribution changes on the consumption structure. The Almost Ideal Demand System model is improved by relaxing its assumption that expenditure equals income and giving it a dynamic form that includes the three characteristics of the income distribution evolution (the mean, variance, and residual effects) and measuring these. The results show that the mean effect is the largest one, and it basically determines the size and direction of the total effect. The variance effect is much smaller, but it may have some positive effects on the individual markets. The residual effect is the smallest and has a certain randomness. The income gap is not the main cause of the insufficient domestic demand. It is more likely to be caused by the decline of the mean effect, and the main driver of this is the irrationality of the supply side and excessive housing prices.
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Hu, Yiming, Xinmin Tian, and Zhiyong Zhu. "Market transaction characteristics and pricing effect of accounting valuation models." China Finance Review International 6, no. 1 (February 15, 2016): 2–31. http://dx.doi.org/10.1108/cfri-05-2015-0036.
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Purpose – In capital market, share prices of listed companies generally respond to accounting information. In 1995, Ohlson proposed a share valuation model based on two accounting indicators: company residual income and book value of net asset. In 2000, Zhang introduced the thought of option pricing and developed a new accounting valuation model. The purpose of this paper is to investigate the valuation deviation and the influence of some market transaction characteristics on pricing models. Design/methodology/approach – The authors use listed companies from 1999 to 2013 as samples, and conduct comparative analysis with multiple regression. Findings – The main findings are: first, the accounting valuation model is applicable to the capital market as a whole, and its pricing effect increases as years go by; second, in the environment of out capital market, the maturity of investors is one of important factors that causes the information content of residual income less than that of profit per share and lower pricing effect of valuation models; third, when the price earning (PE) of listed companies reaches certain level, the overall explanation capacity of accounting valuation models will become lower as PE gets higher; fourth, as for companies with higher turnover rate and more active transaction, the pricing effect of accounting valuation model is obviously lower; fifth, the pricing effect of accounting valuation models in a bull market is lower than in a bear market. Originality/value – These findings establish connection between accounting valuation and market transaction characteristics providing an explorable orientation for the future development of accounting valuation theories and models.
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Tswei, Keshin, and Chen-Yin Kuo. "A Study of Stock Price Behavior in Taiwan via Residual Income Valuation Theory and Structural Identification." Review of Pacific Basin Financial Markets and Policies 15, no. 04 (December 2012): 1250016. http://dx.doi.org/10.1142/s0219091512500166.
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This study adopts the methodology introduced by Lee (2006) to analyze stock prices in response to information shocks in six of Taiwan's stock market sectors and present market anomalies utilizing behavioral finance theory. Using the Residual Income Model (RIM) of equity valuation, we specified our empirical model to identify structural fundamental and nonfundamental shocks from reduced-form tangible and intangible news, and we obtained three major results. First, fundamental shock is primarily induced by tangible news and nonfundamental shock by intangible news, suggesting that tangible-oriented RIM can capture the information content of stock prices. Second, impulse response analyses show that investors generally underreact to fundamental shocks and consistently overreact to nonfundamental shocks in the short-run. This finding is compatible with the overconfidence theory of Daniel et al. (1998) in behavioral finance literature. Third, information diffusion efficiency in a market appears to depend on the value relevance quality of its tangible information. This is based on our finding that when tangible information constitutes a higher share of a market's fundamental shock, its price converges faster to the long-run equilibrium associated with the shock.
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Tiwari, Ranjit, and Harish Kumar Singla. "Do combining value estimates increase valuation accuracy? Evidence from Indian chemical industry." Journal of Accounting in Emerging Economies 5, no. 2 (May 1, 2015): 170–83. http://dx.doi.org/10.1108/jaee-09-2012-0036.
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Purpose – Being a developing nation with huge opportunity of growth prospects the assessment of valuation models becomes important to have a more realistic value estimate. The purpose of this paper is to empirically examine the comparative accuracy and explanatory performance of discounted cash flow (DCF) and residual income model (RIM) valuation models for the Indian chemical industry and come up with a composite valuation model. Design/methodology/approach – To achieve the objective of the study the authors first determine the intrinsic values using both the models. Comparisons of the models are based on prediction errors and the explanatory performance of market value on value estimates. The study uses panel regression to forecast estimates of earnings and measure explanatory performance. The authors examine the ability of the value estimates to explain cross-sectional variation in the observed market values. The study also uses GMM method for deriving robust estimators. Variables for the study are collected from the CMIE’s prowess data base (release 4). The authors consider all 1,075 BSE listed chemical companies for the purpose of the study. The study uses annual data points starting from 31 March 2002 to 31 March 2011. Findings – The comparative framework shows that both Residual Income model and Composite Valuation model are superior to Discounted cash flow model and are equally likely. But since composite value estimates considers all bonafide informations of individual models, the estimates of Composite Valuation model becomes more reliable. Research limitations/implications – The study only compares and combines the two most widely used valuation models around the world. Future studies can be conducted using the third widely used valuation models, i.e. multiples and see the level of accuracy of individuals as well as the composite model. Originality/value – As a concern very few research has been conducted in this area in India. This paper provides practitioners with a snapshot of the applicability of DCF and RIM valuation models. And also shows how a composite value estimate can improve accuracy.
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Kim, Kwon-Jung, Cheol Lee, and Samuel L. Tiras. "The Effects of Adjusting the Residual Income Model for Industry and Firm-Specific Factors When Predicting Future Abnormal Returns." Asia-Pacific Journal of Financial Studies 42, no. 3 (June 2013): 373–402. http://dx.doi.org/10.1111/ajfs.12018.
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Sun, Lei, Huan Huan Li, Pu Yu He, and Zhong Fu Tan. "Wind Power and Pumped Storage Power Joint Operation Benefits Evaluation Model Based on Life-Cycle Theory." Advanced Materials Research 902 (February 2014): 453–56. http://dx.doi.org/10.4028/www.scientific.net/amr.902.453.
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Based on Life-cycle analysis theory, this paper established a wind, thermal and pumped storage power joint operation benefits evaluation model. The life cycle of energy generation joint operation is divided into four stages, including initial investment, project construction, operation and residual value recovery stages.The participation of hydro power generation can increase the amount of wind power generation and network capacity, and reduce thermal power generation amount.It can reduce abandoned wind, improving wind farm income and reduce coal consumption and pollutant emissions at the same time, and reducing the cost of purchasing electricity of the grid.
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Qi, Daqing D., Y. Woody Wu, and Bing Xiang. "Stationarity and Cointegration Tests of the Ohlson Model." Journal of Accounting, Auditing & Finance 15, no. 2 (April 2000): 141–60. http://dx.doi.org/10.1177/0148558x0001500203.
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This paper investigates the time-series properties of the Ohlson (1995) model and examines their implications for empirical studies that use time-series data but do not explicitly account for such properties. Based on a sample of 95 firms with complete data from 1958 to 1994, we show that the null hypothesis that market value and book value are nonstationary cannot be rejected for most of the sample firms. More importantly, book value and residual income do not cointegrate with market value for 80 percent of the sample firms. We demonstrate the importance and relevance of the time-series properties of the model to OLS regressions by showing that the OLS out-of-sample forecasts of market value are significantly more accurate and less biased for the cointegrated firms than for the non-cointegrated firms. We also explore methods to improve the specification of OLS regressions based on the Ohlson (1995) model and suggest that scaling the variables with lagged market value can significantly alleviate the problem with nonstationarity of the unsealed time-series data. While the generality of our results is limited by the survivorship bias of our sample, we believe that our paper has some important implications for studies motivated by the Ohlson (1995) model. First, because market value and book value are nonstationary and book value and residual income do not cointegrate with market value for most firms, the other information variable has to be nonstationary so that a linear combination of the independent variables can cointegrate with market value. Second, direct tests of the Ohlson (1995) model through OLS regressions using time-series data are questionable because they are likely to be misspecified. This may partially explain the underestimation of market value widely documented by previous studies and the significant difference between parameters predicted by the Ohlson (1995) model and estimated from OLS regressions. Third, our results also suggest that scaling the data with lagged market value can mitigate the problems with nonstationarity. For studies using unsealed time-series data, a cointegration test should be conducted first and a sensitivity analysis based on the cointegrated sub-sample should be performed to examine whether the results based on the full sample are robust.
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Lo, Kin, and Thomas Lys. "The Ohlson Model: Contribution to Valuation Theory, Limitations, and Empirical Applications." Journal of Accounting, Auditing & Finance 15, no. 3 (July 2000): 337–67. http://dx.doi.org/10.1177/0148558x0001500311.
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The work of Ohlson (1995) and Feltham and Ohlson (1995) had a profound impact on accounting research in the 1990s. In this paper, we first discuss this valuation framework, identify its key features, and put it in the context of prior valuation models. We then review the numerous empirical studies that are based on these models. We find that most of these studies apply a residual income valuation model without the information dynamics that are the key feature of the Feltham and Ohlson framework. We find that few studies have adequately evaluated the empirical validity of this framework. Moreover, the limited evidence on the validity of this valuation approach is mixed. We conclude that there are many opportunities to refine the theoretical framework and to test its empirical validity. Consequently, the praise many empiricists have given the models is premature.
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Nguyen, Dung Viet, and Lan Thi Ngoc Nguyen. "Impact of Corporate Disclosure on Cost of Equity Capital in Vietnam." International Journal of Financial Research 8, no. 4 (September 14, 2017): 64. http://dx.doi.org/10.5430/ijfr.v8n4p64.
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The objective of the paper is to test the impact of corporate disclosure on the cost of equity capital for firms listed on Vietnam’s stock market. We use the Botosan (1997) scoring methodology and the residual income valuation model to measure disclosure level and the implied cost of equity capital. Our findings suggest that, taking into account other determinants, disclosure has a significant reducing impact on the cost of equity capital.
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Budagaga, Akram Ramadan. "Dividend policy and market value of banks in MENA emerging markets: residual income approach." Journal of Capital Markets Studies 4, no. 1 (July 13, 2020): 25–45. http://dx.doi.org/10.1108/jcms-04-2020-0011.
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PurposeThis study will examine the impact of cash dividends on the market value of banks listed in Middle East and North African (MENA) emerging countries during the period 2000–2015.Design/methodology/approachThe current study adopts residual income approach based on Ohlson's (1995) valuation model. By testing different statistical techniques, fixed effect is applied on panel data for (144) banks listed on 11 MENA stock markets over the period 2000–2015. Furthermore, additional tests are applied to confirm the primary results.FindingsThe analysis reveals that current dividend payouts and dividend yield do not provide information relevant to the establishment of market values in MENA emerging markets; thus, they have no material impact on MENA banks' market values. This lack of current dividend payment effect is consistent with Miller and Modigliani (1961) dividend irrelevance assumption: there is no evidence of either an informational or real cash inflow effect of current dividend payments. The findings of this study can be attributed to the fact that MENA banks may be forced to place more emphasis on allocating money for investment instead of paying dividends given them they are subject to liquidity requirements for investment, expansion, general operations and compliance with regulations. Only after all these financial needs are covered can the remaining surplus be distributed as cash dividends. Therefore, cash dividends represent earnings residual rather than an active decision variable that impacts a firm's market value. This is consistent with the residual dividend hypothesis, which is the crux of Miller and Modigliani (1996) irrelevance theory of dividends.Research limitations/implicationsThe current study is restricted to a sample of one type of financial firms, banks, because of the problem of missing data and limited information related to other financial firms for the same period. Therefore, further research could be additional types of financial firms such as insurance firms that play a vital role in MENA emerging economies.Practical implicationsThe results of this study have some important implications for banks' dividend policymakers. Dividend policymakers in MENA emerging markets seem to follow residual dividend policy, in which they distribute dividends according to what is left over after all acceptable investment opportunities have been undertaken. This makes for inconsistent and unstable dividend policy trends, making it difficult for investors to predict future dividend decisions. Further, this practice may deliver information to shareholders about a lack of positive future investment opportunities, and this may negatively affect the share value of banks.Originality/valueThis study is the first of its kind – up to the author's knowledge – that examines a large cross-country sample of MENA banks (144) to cover a long time period in the recent past, and, more importantly, after the banking sector in the region has experienced major transformations during last two decades. In addition, most of the MENA region countries included in this study, namely, banks, operate in tax-free environments (there are neither taxes on dividends nor on capital gains). This feature adds complexity to the ongoing dividend debate.
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Gao, Zhan, James N. Myers, Linda A. Myers, and Wan-Ting Wu. "Can a Hybrid Method Improve Equity Valuation? An Empirical Evaluation of the Ohlson and Johannesson (2016) Model." Accounting Review 94, no. 6 (March 1, 2019): 227–52. http://dx.doi.org/10.2308/accr-52415.
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ABSTRACT This paper investigates the validity and usefulness of “hybrid” valuation models. We recast the model in Ohlson and Johannesson (2016) as a hybrid of the Dividend Discount Model and an earnings-based price multiple model, and develop a new hybrid model that generalizes the Residual Income Valuation Model. After validating the theoretical properties of these models' unique parameters, we assess the usefulness of the hybrid models in two applications. In application one, we find that intrinsic values from the hybrid models are more accurate than those from common discounted models or price multiple models. These improvements are attributable to the hybrid models' ability to incorporate stock price and more realistic assumptions about growth. In application two, we find that the implied cost of equity from the hybrid models better captures systematic risks and key idiosyncratic risks, and captures expected returns. These results demonstrate the validity and usefulness of hybrid valuation models. JEL Classifications: G12; G14; G17; G31; M41. Data Availability: The data used are publicly available from the sources cited in the text.
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Azar, Samih Antoine. "Gold and US money demand." Economics and Business Letters 7, no. 3 (October 10, 2018): 108. http://dx.doi.org/10.17811/ebl.7.3.2018.108-114.
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This letter is about the long run cointegration relation of the US money demand function that incorporates a gold price variable. A three-equation model is jointly constructed and estimated. The first equation has real gold prices, as a dependent variable, and real money, the real dollar index, a scale variable, and the lagged cointegration residual as independent variables. All the variables are in first-differences of the logs except the cointegration residual. The second equation is the cointegration regression with the same variables in log levels. And the third equation is a GARCH model of the conditional variance of residuals. Two different scale variables are chosen: the industrial production index and the real personal disposable income. Both variables produce close estimates. All coefficients are of the correct expected sign and are statistically different from zero. The evidence presented is highly supportive of the model. In particular we find long run money neutrality, and long run constant economies of scale for both scale variables. Moreover, both the short run and long run elasticities of the real dollar index are also unitary. Surprisingly real money and each one of the two scale variables, have no short run effects on the log of real gold prices, but have only long run effects. One can no more exclude gold from the US money demand without incurring a mis-specification. In this regard gold may be the missing variable that produces the structural breaks found in the literature.
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Nkalu, Chigozie Nelson. "Empirical Analysis of Demand for Real Money Balances in Africa: Panel Evidence from Nigeria and Ghana." African and Asian Studies 19, no. 4 (December 16, 2020): 363–76. http://dx.doi.org/10.1163/15692108-12341461.
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Abstract This study investigates demand for real money balances in Africa using panel time-series data from Nigeria and Ghana between 1970 and 2014. The study employs Levin, Lin, Chu common unit root process and Pedroni Residual Cointegration Test which the results reveal that all the variables in the model are stationary and cointegrated respectively. Data sourced from the World Development Indicators (WDI) were analyzed using Panel Two-Stage Estimated Generalized Least Squares (cross-section Seemingly Unrelated Regression model (SURE)) with Instrumental Variables (IV). The results conform to the liquidity preference theory, with all the variables – inflation, real interest rates, and official exchange rates are statistically significant except real income. It is recommended that the monetary authorities in Africa especially the economies of Nigeria and Ghana should adopt appropriate monetary policies by placing interest rates, inflation and official exchange rates at acceptable levels to boost income through private sector investments.
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DZIKEVIČIUS, Audrius. "FORMATION OF AN INTEGRATED STOCK PRICE FORECAST MODEL IN LITHUANIA." Business, Management and Education 14, no. 2 (December 29, 2016): 292–307. http://dx.doi.org/10.3846/bme.2016.337.
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Technical and fundamental analyses are widely used to forecast stock prices due to lack of knowledge of other modern models and methods such as Residual Income Model, ANN-APGARCH, Support Vector Machine, Probabilistic Neural Network and Genetic Fuzzy Systems. Although stock price forecast models integrating both technical and fundamental analyses are currently used widely, their integration is not justified comprehensively enough. This paper discusses theoretical one-factor and multi-factor stock price forecast models already applied by investors at a global level and determines possibility to create and apply practically a stock price forecast model which integrates fundamental and technical analysis with the reference to the Lithuanian stock market. The research is aimed to determine the relationship between stock prices of the 14 Lithuanian companies listed in the Main List by the Nasdaq OMX Baltic and various fundamental variables. Based on correlation and regression analysis results and application of c-Squared Test, ANOVA method, a general stock price forecast model is generated. This paper discusses practical implications how the developed model can be used to forecast stock prices by individual investors and suggests additional check measures.
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Strambi, Orlando, Jean-Paul Hubert, Yves Bussière, and Karin-Anne van de Bilt. "Automobile Patterns of Diffusion in Four Urban Areas: Comparison of Developed and Developing Countries." Transportation Research Record: Journal of the Transportation Research Board 1719, no. 1 (January 2000): 54–60. http://dx.doi.org/10.3141/1719-07.
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A comparison is presented of the diffusion of the automobile in the metropolitan areas of Paris and Montreal and in two urban areas in developing countries—São Paulo, Brazil, and Puebla, Mexico. The comparison uses a demographic approach, based on the estimation of an age-cohort model. The model takes into account three combined aspects of time: the stage in the life cycle, the generation, and the period. Previous analyses conducted for developed countries indicated that the period effect (including the influence of income) could be considered as residual, in the face of stability of behavior of generations during the observed part of their life cycles. Models for the regions were estimated by using a series of transportation surveys (with the exception of Puebla). The results indicate that comparable patterns can be observed with respect to the life cycle and generation effects, although the ages and generations at which maximum motorization occurs vary among countries, according to their different histories of diffusion of the automobile. On the other hand, the spatial pattern of household motorization presents some fundamental differences for the urban areas of developed and developing countries. Paris and Montreal have higher motorization in the suburbs, but the results for São Paulo and Puebla show the opposite, suggesting the relevance of income effects because the populations in suburban areas have lower income levels.
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Dhakal, Nanda Kumar, and Mitra Prasad Timsina. "Price and output effects of Monetary policy in Low Income Countries: The Case of Nepal." Advances in Social Sciences Research Journal 7, no. 5 (June 5, 2020): 478–99. http://dx.doi.org/10.14738/assrj.75.8318.
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This paper examines the impact of monetary policy on economic growth and inflation in Nepal. The impact on economic growth and inflation have been observed using monetary policy instruments/indicators such as CRR, bank rate, interbank rate, M1, M2, private sector credit based on quarterly data from first quarter of 2006 to fourth quarter of 2018. The impact on economic growth and inflation rate has been examined separately. The econometric methods like ADF test, ARDL Model, Bound Test, Error Correction Model, Residual Test and Stability test have been used in the study. The empirical results show that economic growth and inflation are influenced by monetary policy. CRR, bank rate, broad money and private sector credit are significant to have impact on economic growth. Likewise, money supply (M1 and M2) has impact on inflation. The result shows that it takes longer time to have impact of broad money and private sector credit on economic growth than on inflation.