A Comparison of Equity Valuation Models: Empirical Evidence from a Sample of UK Companies

Kim, Ja Ryong

Abstract

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.

Citation

Kim, J. R. (2019). A Comparison of Equity Valuation Models: Empirical Evidence from a Sample of UK Companies. European Journal of Multidisciplinary Studies, 4(2), 105-120. https://doi.org/10.26417/ejms-2019.v4i2-544

• Journal Article Type: Article
• Acceptance Date: Jun 29, 2019
• Online Publication Date: Jun 29, 2019
• Publication Date: Aug 30, 2019
• Deposit Date: Apr 30, 2020
• Publicly Available Date: May 4, 2020
• Journal: European Journal of Multidisciplinary Studies
• Electronic ISSN: 2414-8385
• Publisher: European Center for Science Education and Research
• Peer Reviewed: Not Peer Reviewed
• Volume: 4
• Issue: 2
• Pages: 105-120
• DOI: https://doi.org/10.26417/ejms-2019.v4i2-544
• Public URL: https://nottingham-repository.worktribe.com/output/4365640
• Publisher URL: http://journals.euser.org/index.php/ejms/article/view/4360