Download or read book Residual Income Reversibility and the Valuation of Equity written by Mark Tippett and published by . This book was released on 2000 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Residual Income Based Equity Valuation written by Young-Soo Choi and published by LAP Lambert Academic Publishing. This book was released on 2010-09 with total page 280 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following the seminal theoretical work of Ohlson (1995), many researchers have tried to investigate the linear information dynamics (LID) model's validity empirically. However, empirical applications of the LID approach to residual income (RI)-based equity valuation have produced estimates of firm value that are substantially lower on average than corresponding observed market values. This book augments the Ohlson model by incorporating residual income and 'other information' intercepts into the original linear information dynamics, in order to capture the impact of the intercept terms on the residual income forecasts and firm values. I argue that the large negative bias in LID-based value estimates might be attributable to failure to deal fully with the effects of conservative accounting in projecting residual income. The main objective of the book is thus to examine whether the 'intercept-inclusive' LID model produces more reliable value estimates than the extant RI-based valuation models. I also address a potentially important issue of the different applicability under different conditions of different RI-based valuation models.

Download or read book Residual Income Information Dynamics and Equity Valuation written by Kwee Keong Choong and published by . This book was released on 2003 with total page 768 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Use of Residual Income Valuation Methods by U S Sell Side Equity Analysts written by John R. M. Hand and published by . This book was released on 2016 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the use of residual income (RI) valuation methods by U.S. sell-side equity analysts, particularly as compared to DCF. We document that RI valuations are rare -- just 1/16th as common as DCF -- and that different RI and DCF valuations are not infrequently provided by the same analyst for the same firm in the same report. We find that while analysts build their RI models around both net operating income (RNOA-RI) and net income (ROE-RI), analysts' RNOA-RI valuations are as optimistic as their DCF valuations and contain RNOAs that increase to an economically implausible terminal year median of 27%. In contrast, analysts' ROE-RI valuations contain ROEs that decline over the forecast horizon to a more plausible terminal year median of 17%. While optimistic when done on their own, analysts' ROE-RI valuations are unbiased when done in tandem with DCF, as are the DCFs that accompany them.

Download or read book Three Residual Income Valuation Methods and Discounted Cash Flow Valuation written by Pablo Fernandez and published by . This book was released on 2019 with total page 12 pages. Available in PDF, EPUB and Kindle. Book excerpt: I show that the three residual Income models for equity valuation always yield the same value as the Discounted Cash Flow Valuation models.lt;brgt;lt;brgt;I use three residual income measures: Economic Profit (EP), Economic Value Added (EVA) and Cash Value Added (CVA). I first show that the present value of the EP discounted at the required return to equity plus the equity book value equals the value of equity (the present value of the Equity cash flow discounted at the required return to equity).lt;brgt;lt;brgt;Then, I show that the present value of the EVA discounted at the WACC plus the enterprise book value (equity plus debt) equals is the enterprise market value ( the present value of the Free cash flow discounted at the WACC).lt;brgt;lt;brgt;Then, I show that the present value of the CVA discounted at the WACC plus the enterprise book value (equity plus debt) is also equal to the enterprise market value.

Download or read book Residual Income Valuation written by James A. Ohlson and published by . This book was released on 2000 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper identifies problems related to RIV in an equity valuation context. Three problems are discussed. First, on a per share basis clean surplus will not generally hold if there are expected changes in shares outstanding; this aspect eliminates a necessary condition for the RIV-formula to be valid. Second, an all equity approach does not work if the firm plans to bring in quot;newquot; shareholders who derive a net benefit from their capital contributions. Third, GAAP violates clean surplus because some capital contributions are not accounted for in market value terms. As an alternative to RIV, the paper shows that it makes more economic/accounting sense to focus on expected eps, adjusted for dps, as a valuation attribute instead of current book value and expected residual earnings.

Download or read book On Comparing Residual Income and Discounted Cash Flow Models of Equity Valuation written by Russell J. Lundholm and published by . This book was released on 2001 with total page 6 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the Summer 2001 issue of Contemporary Accounting Research we published a paper arguing that, given a full set of forecasted financial statements, the value estimates from a residual income model and a discounted cash flow model should yield identical results. The reason prior empirical studies (Penman and Sougiannis 1998 and Francis, Olsson and Oswald 2000) found differences between the models is because of subtle errors in the implementation of the models. Penman (2001) understandably takes issue with our paper, claiming that we are wrong on three points. We feel quite confident in our original paper and will rebut each of Penman's claims. Penman repeatedly states that he is interested in practical issues surrounding valuation. We share this interest; in fact, we were motivated to write our paper because of the common question raised by students and faculty: quot;why do I get a different answer from my discounted cash flow valuation than from my residual income valuation?quot; We still maintain that, if carefully done, there will be no difference in the valuations from these theoretically equivalent models. Our paper shows exactly how to do this and illustrates commonly made mistakes.

Download or read book Essays on the Residual Income Valuaiton Model written by Qiang Cheng and published by . This book was released on 2002 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Equivalance of Dividend Cash Flows and Residual Earnings Approaches to Equity Valuation Employing Ideal Terminal Value Expressions written by Lucie Courteau and published by . This book was released on 2013 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recently, Penman and Sougiannis (1998) and Francis, Olsson and Oswald (1999) compared the bias and accuracy of the dividend discount model (DDM), discounted cash flow model (DCF), and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non price-based terminal values, RIM outperforms DCF and DDM. Our primary research objective is to explore whether, over a five-year valuation horizon, DDM, DCF and RIM are empirically equivalent when Penman's (1998) theoretically quot;idealquot; terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these three price-based valuation models.Our secondary research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression will generate the lowest pricing errors, compared to models that employ non price-based terminal value under an arbitrary growth assumption. Results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non price-based models by a wide margin. We also revisit the issue of the apparent superiority of RIM, and find that this result does not hold in a level playing field where an approximation of ideal terminal values is employed. In fact, the price-based RIM model is marginally outperformed by the price-based DCF and DDM models, in terms of pricing errors as well as its ability to explain current market price.

Download or read book Addressing Puzzle About Equity Valuation Using Multiples written by Ja Ryong Kim and published by . This book was released on 2014 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: Since Liu, Nissim and Thomas (LNT, 2002), researchers have been perplexed by how simple earnings forecasts using multiples, apparently outperform the theory-based residual income model in terms of pricing error. This paper explains mathematically how LNT (2002) find this curious result and demonstrates that, in terms of pricing error, the majority of residual income models in fact outperform earnings forecasts using multiples. The explanation for the LNT (2002) result is in their selection of comparators: they choose residual income models that perform the worst among residual income models, and compare them with the best performing multiples. In terms of future return generation, this paper reports that the majority of residual income models again outperform earnings forecasts using multiples, further supporting the superiority of theory-based valuation models to rule-of-thumb based models in price estimation and future return generation. The paper resolves a decade-old puzzle in equity valuation and demonstrates that theory-based valuation models are empirically superior to rule-of-thumb based valuation models.

Download or read book Clean Surplus Residual Income and Earnings Based Valuation Models written by John O'Hanlon and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by the fact that residual income based models of the link between the value of equity capital and the outputs of accrual accounting recently appearing in the literature have been based on particular assumed classes of residual income time series process, this paper presents a general residual income based expression for the value of equity capital which allows for clean surplus residual income to be generated by any class of ARIMA time series process. It shows that other models appearing in the literature are re-arrangements of special cases of this general expression. Further, motivated by the possibility that unscaled residual income data might plausibly exhibit explosive characteristics which would make it inappropriate to attempt to fit ARIMA models, a general expression for the value of equity is presented in terms of residual income scaled by book value. Re-arrangements of a number of simple special cases of this expression are explored. It is shown that, depending upon the time series properties of the scaled residual income measure, various combinations of the mean Accounting Rate of Return, the current level of Accounting Rate of Return, the current first difference of Accounting Rate of Return and a lagged Market to Book term can appear in accounting based models of the value of equity.

Download or read book Comparative Implementation Study of the Residual Income and Discounted Cashflow Methods of Equity Valuation in the Context of UK Company Flotation written by Sarah L. Pedley and published by . This book was released on 2002 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Using the Residual Income Stock Price Valuation Model to Teach and Learn Ratio Analysis written by Robert F. Halsey and published by . This book was released on 2001 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Reconciling Value Estimates from the Discounted Cash Flow Model and the Residual Income Model written by Russell J. Lundholm and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines why practitioners and researchers get different estimates of equity value when they use a discounted cash flow (CF) model versus a residual income (RI) model. Both models are derived from the same underlying assumption - that price is the present value of expected future net dividends discounted at the cost of equity capital - but in practice and in research they frequently yield different estimates. We argue that the research literature devoted to comparing the accuracy of these two models is misguided; properly implemented, both models yield identical valuations for all firms in all years. We identify how prior research has applied inconsistent assumptions to the two models and show how these seemingly small errors cause surprisingly large differences in the value estimates.

Download or read book What Determines Residual Income written by Qiang Cheng and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book An Empirical Test of the Accounting Based Residual Income Model and the Traditional Dividend Discount Model written by Xiaoquan Jiang and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Given the failure of the conventional dividend discount model to explain volatile, dynamic stock price movements, we test the empirical validity of an alternative model, the accounting-based residual income model (RIM), which posits that the current stock price equals the current book value of equity plus the present value of expected future residual income. We test two implications of the two models: volatility of prices relative to fundamentals and the model's dynamic implications by cross-equation restrictions. We find that, for stock valuation, book values and accounting earnings in the RIM contain more useful information than dividends alone.

Download or read book Extended Dividend Cash Flow and Residual Income Valuation Models written by and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital. -- Dirty Surplus ; Terminal Value ; Steady-State ; Valuation Error