Extended Dividend, Cash Flow and Residual Income Valuation Models - Accounting for Deviations from Ideal Conditions

Posted: 6 Dec 2012

See all articles by Nicolas Heinrichs

Nicolas Heinrichs

University of Cologne - Graduate School of Risk Management

Dieter Hess

University of Cologne - Department of Corporate Finance; University of Cologne - Centre for Financial Research (CFR)

Carsten Homburg

University of Cologne

Michael Lorenz

University of Cologne

Soenke Sievers

Paderborn University

Multiple version iconThere are 2 versions of this paper

Date Written: April 9, 2009

Abstract

Previous empirical studies derive the standard equity valuation models (i.e., DDM, RIM, and DCF model) while assuming that ideal conditions, such as infinite payoffs and clean surplus accounting, exist. Because these conditions are rarely met, we extend the standard models by following the fundamental principle of financial statement articulation. We then empirically test the extended models by employing two sets of forecasts: (1) the analyst forecasts provided by Value Line, and (2) the forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by constructing these models, we obtain identical value estimates across the extended models. By reestablishing empirical equivalence under nonideal conditions, our approach provides a benchmark that enables us to quantify the errors caused by individual deviations from ideal conditions and thus to analyze the robustness of the standard models. Finally, by providing a level playing field for the different valuation models, our findings have implications for other empirical approaches, for example, estimating the implied cost of capital.

Keywords: Dividend Discount Model, Residual Income, Discounted Cash Flow, Dirty Surplus, Terminal Value, Valuation Error

JEL Classification: G12, G14, M41

Suggested Citation

Heinrichs, Nicolas and Hess, Dieter and Homburg, Carsten and Lorenz, Michael and Sievers, Soenke, Extended Dividend, Cash Flow and Residual Income Valuation Models - Accounting for Deviations from Ideal Conditions (April 9, 2009). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2185081

Nicolas Heinrichs

University of Cologne - Graduate School of Risk Management ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

Dieter Hess (Contact Author)

University of Cologne - Department of Corporate Finance ( email )

Corporate Finance Seminar
Albertus-Magnus-Platz
D-50923 Cologne
Germany
+49 221 470 7876 (Phone)
+49 221 470 7466 (Fax)

HOME PAGE: http://cf.uni-koeln.de/

University of Cologne - Centre for Financial Research (CFR)

Germany

Carsten Homburg

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Michael Lorenz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Soenke Sievers

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

HOME PAGE: http://www.upb.de/accounting

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,379
PlumX Metrics