An Empirical Assessment of the Residual Income Valuation Model

Download or read book An Empirical Assessment of the Residual Income Valuation Model written by Patricia M. Dechow and published by . This book was released on 1997 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides an empirical assessment of the residual income valuation model presented in Ohlson (1995). We demonstrate that existing empirical research using Ohlson2s model is remarkably similar to past empirical workbased on the standard version of the dividend discounting model. We establish that the key unexploited empirical implications of Ohlson2s model derive from its assumption concerning the time-series properties of residual income. We show that this assumption is more empirically descriptive than the assumptions embedded in popular accounting-based valuation models. We find that a simple empirical version of the residual income valuation model provides modest improvements over the popular models in predicting and explaining future (abnormal) earnings, current stock prices and current stock returns. We also show that the residual income valuation model is the best predictor of future stock returns, and that this result is, at least in part, due to its ability to identify systematic errors inanalysts2 earnings forecasts.