The Valuation Accuracy of Equity Value Estimates Inferred from Conventional Empirical Implementations of the Abnormal Earnings Growth Model: US Evidence

26 Pages Posted: 11 May 2011

See all articles by Bjorn Jorgensen

Bjorn Jorgensen

Yong Gyu Lee

Seoul National University

Yong Keun Yoo

Korea University Business School

Date Written: April/May 2011

Abstract

We compare the valuation accuracy of the equity value estimates inferred from empirical implementations of the abnormal earnings growth model (Ohlson and Juettner-Nauroth 2005; the OJ estimates) with the residual income model (Ohlson 1995; the RIV estimates). We find that the OJ estimates generally underperform the RIV estimates. Increasing the forecast horizon for the OJ estimates from two to five years significantly improves their valuation accuracy. However, relative to the RIV estimates, the valuation accuracy of the OJ estimates remains lower even using a five-year forecast horizon. Finally, we compare predicted accounting profitability with actual accounting profitability and find that the lower valuation accuracy of the OJ estimates is attributable to the empirical assumptions regarding future earnings growth beyond the forecast horizon.

Keywords: abnormal earnings growth, equity valuation, residual income, valuation accuracy

Suggested Citation

Jorgensen, Bjorn N and Lee, Yong Gyu and Yoo, Yong Keun, The Valuation Accuracy of Equity Value Estimates Inferred from Conventional Empirical Implementations of the Abnormal Earnings Growth Model: US Evidence (April/May 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 3-4, pp. 446-471, 2011, Available at SSRN: https://ssrn.com/abstract=1838046 or http://dx.doi.org/10.1111/j.1468-5957.2011.02241.x

Yong Gyu Lee

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Yong Keun Yoo

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

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