Can a Hybrid Method Improve Equity Valuation? An Empirical Evaluation of the Ohlson and Johannesson (2016) Model

The Accounting Review (2019)

Posted: 28 Apr 2017 Last revised: 7 Mar 2019

See all articles by Zhan Gao

Zhan Gao

Lancaster University

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Wan-Ting Wu

University of Massachusetts Boston

Date Written: February 18, 2019

Abstract

This paper investigates the validity and usefulness of “hybrid” valuation models. We recast the model in Ohlson and Johannesson (2016) as a hybrid of the Dividend Discount Model and an earnings-based price multiple model, and develop a new hybrid model that generalizes the Residual Income Valuation Model. After validating the theoretical properties of these models’ unique parameters, we assess the usefulness of the hybrid models in two applications. In application one, we find that intrinsic values from the hybrid models are more accurate than those from common discounted models or price multiple models. These improvements are attributable to the hybrid models’ ability to incorporate stock price and more realistic assumptions about growth. In application two, we find that the implied cost of equity from the hybrid models better captures systematic risks and key idiosyncratic risks, and captures expected returns. These results demonstrate the validity and usefulness of hybrid valuation models.

Keywords: equity valuation, discounted models, price multiple models, cost of equity

JEL Classification: G12, G14, G17, G31, M41

Suggested Citation

Gao, Zhan and Myers, James N. and Myers, Linda A. and Wu, Wan-Ting, Can a Hybrid Method Improve Equity Valuation? An Empirical Evaluation of the Ohlson and Johannesson (2016) Model (February 18, 2019). The Accounting Review (2019). Available at SSRN: https://ssrn.com/abstract=2959986 or http://dx.doi.org/10.2139/ssrn.2959986

Zhan Gao

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom
44-1524-593-151 (Phone)

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Wan-Ting Wu

University of Massachusetts Boston ( email )

100 Morrissey Boulevard
Boston, MA 02125
United States

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