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Journal articles on the topic 'Residual income valuation model'

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Published: 4 June 2021
Last updated: 25 April 2022

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1

Ashton, David, Ken Peasnell, and Pengguo Wang. "Residual Income Valuation Models and Inflation." European Accounting Review 20, no. 3 (September 2011): 459–83. http://dx.doi.org/10.1080/09638180.2010.493661.

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2

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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3

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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4

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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5

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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6

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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7

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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8

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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9

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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10

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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11

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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12

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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13

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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14

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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15

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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16

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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17

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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18

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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19

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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20

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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21

Żelazowski, Konrad. "Significance Of Residual Value In Asset Valuation." Real Estate Management and Valuation 22, no. 1 (March 1, 2014): 44–50. http://dx.doi.org/10.2478/remav-2014-0006.

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Abstract The construction of residual value is a key element of income methods in asset valuation. Its main task is to include asset value at the end of the forecasted cash flow period. Although it is common to apply simplified models of residual value in valuation practice, its meaning in shaping the final outcome is substantial. The aim of the article is to emphasize the role of using an appropriate formula in determining residual value in the valuation process. Moreover, alternative methods of estimating residual value will be presented together with scenarios of applying them.
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22

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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23

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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24

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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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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Kohlbeck, Mark, and Terry D. Warfield. "Unrecorded Intangible Assets: Abnormal Earnings and Valuation." Accounting Horizons 21, no. 1 (March 1, 2007): 23–41. http://dx.doi.org/10.2308/acch.2007.21.1.23.

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We use the unique banking industry setting to demonstrate the impact of unrecorded intangible assets on abnormal earnings and equity valuation in the context of the residual income valuation model. We show that the persistence of bank abnormal earnings and, consequently, the pricing multiples on bank abnormal earnings, vary with the level of unrecorded intangible assets. Our evidence suggests that unrecorded intangible assets are important in understanding the persistence and valuation of abnormal earnings in the banking industry. The analysis framework introduced in this paper could also be used to examine the valuation impacts of intangible assets in other industries.
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Fullana, Olga, Mariano González, and David Toscano. "The Role of Assumptions in Ohlson Model Performance: Lessons for Improving Equity-Value Modeling." Mathematics 9, no. 5 (March 2, 2021): 513. http://dx.doi.org/10.3390/math9050513.

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In this paper, we test whether the short-run econometric conditions for the basic assumptions of the Ohlson valuation model hold, and then we relate these results with the fulfillment of the short-run econometric conditions for this model to be effective. Better future modeling motivated us to analyze to what extent the assumptions involved in this seminal model are not good enough approximations to solve the firm valuation problem, causing poor model performance. The model is based on the well-known dividend discount model and the residual income valuation model, and it adds a linear information model, which is a time series model by nature. Therefore, we adopt the time series approach. In the presence of non-stationary variables, we focus our research on US-listed firms for which more than forty years of data with the required cointegration properties to use error correction models are available. The results show that the clean surplus relation assumption has no impact on model performance, while the unbiased accounting property assumption has an important effect on it. The results also emphasize the uselessness of forcing valuation models to match the value displacement property of dividends.
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28

Pazarzi, Georgia. "Comparison of the Residual Income and the Pricing - Multiples Equity Valuation Models." International Journal of Economics and Business Administration II, Issue 3 (December 1, 2014): 88–114. http://dx.doi.org/10.35808/ijeba/50.

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29

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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Nguyen, Dzung Viet. "Relative Versus Fundamental Valuation: An Empirical Study of US Biotechnology Firms Around the 2000 High-Tech Bubble." International Journal of Financial Research 11, no. 6 (December 6, 2020): 226. http://dx.doi.org/10.5430/ijfr.v11n6p226.

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This study is related to the issue of whether the stock market reflects the fundamental value of high-tech firms around the 2000 high-tech bubble. We extend the literature on firm valuation by exploiting the conceptual difference between intrinsic and relative values. We apply the residual income model and valuation multiples to estimate these two values respectively and make a comparison for a sample of biotechnology firms. Under realistic assumptions, it seems that estimated fundamental values of these firms fail to be reflected by the stock market. Their market valuation is rather based on relative value for both periods before and after the fall of high-tech stocks.
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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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Nekrasov, Alexander, and Pervin K. Shroff. "Fundamentals-Based Risk Measurement in Valuation." Accounting Review 84, no. 6 (November 1, 2009): 1983–2011. http://dx.doi.org/10.2308/accr.2009.84.6.1983.

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ABSTRACT: We propose a methodology to incorporate risk measures based on economic fundamentals directly into the valuation model. Fundamentals-based risk adjustment in the residual income valuation model is captured by the covariance of ROE with market-wide factors. We demonstrate a method of estimating covariance risk out of sample based on the accounting beta and betas of size and book-to-market factors in earnings. We show how the covariance risk estimate can be transformed to obtain the fundamentals-based cost of equity. Our empirical analysis shows that value estimates based on fundamental risk adjustment produce significantly smaller deviations from price relative to the CAPM or the Fama-French three-factor model. We further find that our single-factor risk measure, based on the accounting beta alone, captures aspects of risk that are indicated by the book-to-market factor, largely accounting for the “mispricing” of value and growth stocks. Our study highlights the usefulness of accounting numbers in pricing risk beyond their role as trackers of returns-based measures of risk.
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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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Harasheh, Murad, Andrea Amaduzzi, and Fairouz Darwish. "The relevance of valuation models: insights from Palestine exchange." International Journal of Islamic and Middle Eastern Finance and Management 13, no. 5 (July 15, 2020): 827–45. http://dx.doi.org/10.1108/imefm-08-2019-0367.

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Purpose This paper aims to investigate the relevance of two groups of valuations models as follows: the accounting models based on the residual income (RIM) and the standard market model, on equity price, return and volatility relevance. Design/methodology/approach The models are tested on companies traded on Palestine exchange from 2009 to 2018, using panel regression analysis. Two-price and two-return models derived from RIM to compare with the market model and four volatility models. Findings The standard RIM outperformed other models in equity price modeling. The dividend discount model (DDM) outperformed the rest of the models in terms of return estimation. However, the authors find that the market model can explain equity variance better than RIM and DDM models. Practical implications For investors, market beta does not necessarily capture all relevant factors of value and traditional financial statements are still important in providing relevant information and different models are used for different values perspectives (price, return and volatility). Originality/value Previous studies focus on comparing the price and return relevance of accounting-based models (RIM and cash flow models). Three aspects differentiate this paper and contribute to its originality, namely, the uniqueness of the context, incorporating the market model into the picture along with the accounting-based models and adding Volatility dimensions of relevance.
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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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Barth, Mary E., William H. Beaver, John R. M. Hand, and Wayne R. Landsman. "Accruals, Accounting-Based Valuation Models, and the Prediction of Equity Values." Journal of Accounting, Auditing & Finance 20, no. 4 (October 2005): 311–45. http://dx.doi.org/10.1177/0148558x0502000401.

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This study uses out-of-sample equity value estimates to determine whether earnings disaggregation, imposing linear information valuation model (LIM) structure and separate industry estimation of valuation model parameters aid in predicting contemporaneous equity values. We consider three levels of earnings disaggregation: aggregate earnings, cashflow and total accruals and cash flow and four major components of accruals. For pooled estimations, imposing the LIM structure results in significantly smaller prediction errors; for by-industry estimations, it does not. However, by-industry prediction errors are substantially smaller, suggesting that the by-industry estimations are better specified. Mean squared and absolute prediction errors are smallest when earnings are disaggregated into cash flow and major accrual components; median prediction errors are smallest when earnings are disaggregated into cash flow and total accruals. These findings suggest that (1) if concern is with errors in the tails of the equity value prediction error distribution, then earnings should be disaggregated into cash flow and the major accrual components; otherwise earnings should be disaggregated only into cash flow and total accruals; (2) imposing the LIM structure neither increases nor decreases prediction errors, which supports the efficacy of drawing inferences from valuation equations based on residual income models that do not impose the structure implied by the model; (3) valuation of abnormal earnings, accruals, accrual components, equity book value, and other information varies significantly across industries.
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Heinrichs, Nicolas, Dieter Hess, Carsten Homburg, Michael Lorenz, and Soenke Sievers. "Extended Dividend, Cash Flow, and Residual Income Valuation Models: Accounting for Deviations from Ideal Conditions*." Contemporary Accounting Research 30, no. 1 (April 30, 2012): 42–79. http://dx.doi.org/10.1111/j.1911-3846.2011.01148.x.

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Collins, Julie H., and Deen Kemsley. "Capital Gains and Dividend Taxes in Firm Valuation: Evidence of Triple Taxation." Accounting Review 75, no. 4 (October 1, 2000): 405–27. http://dx.doi.org/10.2308/accr.2000.75.4.405.

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Although firms account for entity-level taxes, they do not account for shareholder-level capital gains and dividend taxes. To account for these proprietary-level taxes, we add them to a residual-income equity valuation model. Empirical analysis supports the model's predictions. First, both capital gains and dividend taxes reduce investors' implicit valuation of the reinvested portion of earnings. Second, dividend taxes reduce the valuation of the portion of earnings distributed as dividends, but capital gains taxes do not. Third, dividend taxes reduce the valuation of retained earnings equity, but again, capital gains taxes do not. These findings suggest that investors implicitly extend entity-level accounting to the proprietary level when they value the firm. The findings also suggest that when fully accounting for the effects of implicit dividend taxes, reinvested earnings appear to be subject to three levels of taxation—corporate, dividend, and capital gains taxes. Paying earnings out as dividends eliminates the capital gains layer of tax and may provide a net wealth benefit for shareholders, rather than a tax penalty as commonly assumed.
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Suwardi, Eko. "The Evolution in Value Relevance of Accounting Measures in Indonesia." Gadjah Mada International Journal of Business 22, no. 1 (May 21, 2020): 49. http://dx.doi.org/10.22146/gamaijb.54059.

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This paper utilizes the model of share price, which is derived from the valuation model of residual income, to rigorously assess the evolution of value relevance of accounting measures in Indonesia, an emerging market country which has its landscape of equity valuation changed substantially. Using two different approaches, cross sectional and panel regressions, the results indicates a strong linear association between share price and accounting measures. Cross-sectional yearly price regressions provide a strong evidence of non-linear changes on the value relevance of accounting measures over time. Moreover, using panel data analysis, the results of unconditional comparison tests reveal that that the increased value-relevance of the balance sheet would be offset by a reduction of the value-relevance of earnings per share during IFRS regime. It could potentially contribute to explain the decrease in value relevance of accounting numbers during the switchover to IFRS in Indonesia.
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Artikis, Panagiotis. "Market Efficiency and Fundamental Valuation. Evidence from the German Stock Exchange." Journal of Prediction Markets 12, no. 2 (December 5, 2018): 26–46. http://dx.doi.org/10.5750/jpm.v12i2.1548.

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The present paper tests whether the intrinsic value of firm, estimated with the residual income model (RIM), and the resulting value-to-price (V/P) ratio can explain the cross section of stocks returns. The study enhances the literature in the area of asset pricing by the introduction of a new intrinsic value risk factor in such a manner as to obtain a monotonic relation between risk and expected returns. Furthermore, we incorporate in the RIM, for the first time, a time series model that does not rely on analysts’ forecasts for the estimation of the key parameters of the model. A unique dataset from Germany is utilized, from 31/12/1989 to 30/6/2016, contributing by this way to the necessary accumulation of non-US research. The results show the existence for longer time periods of a V/P ratio effect that is persistent and cannot be explained by either the systematic risk, the size or the BE/ME ratio of the sample firms. The results of the regressions models indicated that the intrinsic value risk factor is positively related to stock returns and that it increases the explanatory power of the asset pricing models whenever it is explicitly included in them.
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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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SKOGSVIK, STINA, and KENTH SKOGSVIK. "Accounting-Based Probabilistic Prediction of ROE, the Residual Income Valuation Model and the Assessment of Mispricing in the Swedish Stock Market." Abacus 46, no. 4 (November 24, 2010): 387–418. http://dx.doi.org/10.1111/j.1467-6281.2010.00325.x.

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43

Kuo, Chen-Yin. "Does the vector error correction model perform better than others in forecasting stock price? An application of residual income valuation theory." Economic Modelling 52 (January 2016): 772–89. http://dx.doi.org/10.1016/j.econmod.2015.10.016.

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44

Nogueira Reis, Pedro M., and Marion Gomes Augusto. "Determinants Of Firm Terminal Value: The Perspective Of North American And European Financial Analysts." International Business & Economics Research Journal (IBER) 13, no. 4 (June 30, 2014): 793. http://dx.doi.org/10.19030/iber.v13i4.8687.

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Company valuation models attempt to estimate the value of a company in two stages: (1) comprising of a period of explicit analysis and (2) based on unlimited production period of cash flows obtained through a mathematical approach of perpetuity, which is the terminal value. In general, these models, whether they belong to the Dividend Discount Model (DDM), the Discount Cash Flow (DCF), or RIM (Residual Income Models) group, discount one attribute (dividends, free cash flow, or results) to a given discount rate. This discount rate, obtained in most cases by the CAPM (Capital asset pricing model) or APT (Arbitrage pricing theory) allows including in the analysis the cost of invested capital based on the risk taking of the attributes. However, one cannot ignore that the second stage of valuation that is usually 53-80% of the company value (Berkman et al., 1998) and is loaded with uncertainties. In this context, particular attention is needed to estimate the value of this portion of the company, under penalty of the assessment producing a high level of error. Mindful of this concern, this study sought to collect the perception of European and North American financial analysts on the key features of the company that they believe contribute most to its value. For this feat, we used a survey with closed answers. From the analysis of 123 valid responses using factor analysis, the authors conclude that there is great importance attached (1) to the life expectancy of the company, (2) to liquidity and operating performance, (3) to innovation and ability to allocate resources to R&D, and (4) to management capacity and capital structure, in determining the value of a company or business in long term. These results contribute to our belief that we can formulate a model for valuating companies and businesses where the results to be obtained in the evaluations are as close as possible to those found in the stock market.
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Feltham, Gerald A., and Jinhan Pae. "Analysis of the Impact of Accounting Accruals on Earnings Uncertainty and Response Coefficients." Journal of Accounting, Auditing & Finance 15, no. 3 (July 2000): 199–220. http://dx.doi.org/10.1177/0148558x0001500301.

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This paper uses the residual income valuation model in Feltham and Ohlson (1996) as the basis for developing a model in which management has private information and their choice of accruals influences the information received by investors. The noisiness of accruals relative to management's private value relevant information is exogenous. The analysis examines how the characteristics of the management's private information and their accrual choice process influences the variance of unexpected earnings and the earnings response coefficient. The variance of unexpected earnings is shown to be an increasing function of the noise in managed accruals, but information enhancing earnings management does not necessarily decrease the variance of unexpected earnings. It depends on the nature of the information. The earnings response coefficient is shown to depend on both the persistence of earnings as well as the informativeness of reported earnings.
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Kim, Ja Ryong. "A Comparison of Equity Valuation Models: Empirical Evidence from a Sample of UK Companies." European Journal of Multidisciplinary Studies 4, no. 2 (May 31, 2019): 105. http://dx.doi.org/10.26417/ejms-2019.v4i2-544.

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This paper aims to answer one main question: can the superior models in accounting field be superior in finance field? That is, can models that generate a better approximation to stock price also generate higher returns in the future? To answer this question, I conduct pricing errors analysis and time-series returns analysis. The most important finding is models that approximate stock price better tend to produce higher returns in the future; implying findings in accounting literature have practical implications to analysts and investors. The consistent rankings of models are observed throughout the research: forward earnings multiples perform the best, followed by fundamental valuation models and historical earnings multiples, and book value and sales multiples worst. However, multiples are ranked rather as a group in the UK. Interestingly, residual income models produce similar returns to forward earnings multiples, but the accuracy of their estimates varies depending on their terminal value assumptions.
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Toerien, Francois, and Matthew Marcus. "The Effect Of South African Dividend And Capital Gains Taxes On Share Prices And Investor Expected Returns." Journal of Applied Business Research (JABR) 30, no. 3 (April 24, 2014): 895. http://dx.doi.org/10.19030/jabr.v30i3.8574.

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<p>We examine the effect of South African taxes, specifically the secondary tax on companies (STC) and the dividends tax (DT) that replaced it, as well as capital gains tax (CGT), on investor measures of expected return and firm value. The discussion, findings, and models presented in this study are entirely original in the field of South African corporate finance research. We model the relationship between STC, CGT, and expected return and use this relationship to formulate an hypothesis of the expected behaviour of ex-ante measures of implied cost of capital for a sample of listed South African companies. We calculate these measures by formulating a unique South African version of the residual income valuation model (RIVM) and then regress derived measures of the implied equity premium on historical measures of dividend yield, ultimately concluding that investors appear to recognise the net tax benefit of dividends and capitalise this benefit into stock prices. Finally, we examine the expected position of each of these areas in light of the proposed shareholder dividend tax regime.</p>
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Sant'Anna, Dimitri Pinheiro de, Luiz Claudio Louzada, Edson Queiroz, and Bruno Perez Ferreira. "VALOR DE MERCADO E VALOR CONTÁBIL E SUA RELAÇÃO COM OS RESULTADOS ANORMAIS NO MERCADO DE CAPITAIS NO BRASIL." Revista de Contabilidade e Organizações 9, no. 23 (April 21, 2015): 3. http://dx.doi.org/10.11606/rco.v9i23.61873.

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<p>Este estudo analisa a relação entre o <em>Price/Book</em> (P/B) das ações negociadas na Bolsa de Valores e os Resultados Anormais. O conceito de Resultado Anormal (<em>residual income</em>) utilizado neste estudo baseia-se no Modelo de <em>Residual Income Valuation</em> de Ohlson e fornece o arcabouço teórico para se valorizar/avaliar as empresas a partir de seus resultados contábeis, relacionando, consequentemente, os resultados anormais com o <em>Price/Book</em> apresentado pelas ações das empresas. Testou-se, a partir de duas carteiras de ações (uma com os maiores P/B e outra com os menores P/B para cada ano entre 1996 e 2011), se as empresas que apresentavam os maiores P/B seriam aquelas empresas que geravam os maiores resultados anormais. Os testes indicaram que realmente as carteiras de maior P/B foram as que apresentaram os maiores resultados anormais, pelo menos para treze dos dezesseis anos pesquisados, já que para três anos os resultados não puderam ser considerados estatisticamente diferentes a um nível de significância de cinco por cento.</p>
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Lundholm, Russell J., and Terrence B. O'Keefe. "On Comparing Residual Income and Discounted Cash Flow Models of Equity Valuation: A Response to Penman 2001 (CAR , Winter 2001)*." Contemporary Accounting Research 18, no. 4 (December 2001): 693–96. http://dx.doi.org/10.1506/y51r-c3yf-mt0t-bwe2.

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50

Nasfi Salem, Faten. "Comparative study of Ohlson and cash flow discounting models in the prediction of the stock price." Corporate Ownership and Control 18, no. 2 (2021): 162–68. http://dx.doi.org/10.22495/cocv18i2art13.

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Two models derived from the dividend discount model attracted the attention of researchers: the residual income model (RIM) and the Ohlson model. These models are said to be dualistic since they combine both aspects of the economic and accounting vision. We propose, in our study, to test the performance of the dualistic evaluation model and to show the importance of accounting information. To do this, we will calculate the value of a listed company according to the actuarial valuation model, namely: the available cash flow discounting model (DCF) and the Ohlson model as a dualistic model. Then, we will determine, based on the expectation and the variance of the signed prediction error (SPE), the model that comes closest to the market price in the case of a Tunisian listed company. The results found in the Tunisian context show the superiority of the Ohlson model in the prediction of stock market prices. This model underlies the traditional belief that the company value is compounded of two main parts: the net value of the investment made in it (book value) and the present value of the period benefits (earnings) that together bring the “clean surplus” concept of the shareholders’ equity value. Specifically, Ohlson (1995) motivates the adoption of the historical price model in value relevance studies, which expresses value as a function of earnings and book values
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