An Empirical Test of the Accounting‐Based Residual Income Model and the Traditional Dividend Discount Model

2005 ◽  
Vol 78 (4) ◽  
pp. 1465-1504 ◽  
Author(s):  
Xiaoquan Jiang ◽  
Bon‐Soo Lee
Keyword(s):  
Empirical Test ◽  
Residual Income ◽  
Residual Income Model ◽  
Dividend Discount Model ◽  
Income Model

scholarly journals Bank Valuation Models – A Comparative Analysis

2017 ◽  
Vol 6 (3) ◽  
pp. 116
Author(s):  
Chitra Gunshekhar Gounder ◽  
M. Venkateshwarlu
Keyword(s):  
Public Sector ◽  
Private Sector ◽  
Value Creation ◽  
Shareholder Value ◽  
Market Price ◽  
Residual Income ◽  
Valuation Model ◽  
Residual Income Model ◽  
Income Model ◽  
Relative Valuation

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. 

Do combining value estimates increase valuation accuracy? Evidence from Indian chemical industry

2015 ◽  
Vol 5 (2) ◽  
pp. 170-183 ◽  
Author(s):  
Ranjit Tiwari ◽  
Harish Kumar Singla
Keyword(s):  
Cash Flow ◽  
Chemical Industry ◽  
Residual Income ◽  
Annual Data ◽  
Discounted Cash Flow ◽  
Content Type ◽  
Market Values ◽  
Valuation Model ◽  
Residual Income Model ◽  
Income Model

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.

scholarly journals Valuation properties of accounting numbers in Brazil

2004 ◽  
Vol 1 (3) ◽  
pp. 31-36
Author(s):  
Alexsandro Broedel Lopes
Keyword(s):  
Stock Exchange ◽  
Residual Income ◽  
Net Income ◽  
Book Value ◽  
Residual Income Model ◽  
Significant Difference ◽  
Accounting Numbers ◽  
Dividend Distribution ◽  
Comparable Performance ◽  
Income Model

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.

How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?

2004 ◽  
Vol 79 (1) ◽  
pp. 25-50 ◽  
Author(s):  
Mark T. Bradshaw
Keyword(s):  
Explanatory Power ◽  
Earnings Forecasts ◽  
Model Specification ◽  
Residual Income ◽  
Present Value ◽  
Stock Recommendations ◽  
Earnings Growth ◽  
Residual Income Model ◽  
Income Model

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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