Imputed Earnings Forecasts from the Residual Income Model

Posted: 5 Sep 2002

See all articles by Michael Lacina

Michael Lacina

University of Houston-Clear Lake - School of Business

Byung T. Ro

Purdue University - Krannert School of Management

Date Written: June 2002

Abstract

This paper imputes future earnings per share (EPS) from the residual income (RI) model and examines their accuracy and bias compared with I/B/E/S median consensus forecasts. Using a firm's current market value as an approximation to its intrinsic value, we invert the value-earnings relation and estimate future annual EPS from four versions of the RI model: the capitalization model (CM), the finite horizon RI model with no terminal value (RIM), and RIM with a terminal value based on constant and decaying RI streams beyond the forecast horizon (RIMTVc and RIMTVd, respectively). We find that the CM, RIMTVd, and RIMTVc imputed EPS forecasts are similar in accuracy to analyst forecasts. However, mean signed errors from estimates based on those three RI models are so close to zero that they appear almost bias free, while the analyst forecasts are consistently upward biased. Also, we find that accuracy of the imputed EPS forecasts, like the analyst forecasts, is higher in the 1990s than in the 1980s. Collectively, our results suggest that the RI valuation framework can be used to impute a firm's future raw earnings.

JEL Classification: M41, G12

Suggested Citation

Lacina, Michael and Ro, Byung T., Imputed Earnings Forecasts from the Residual Income Model (June 2002). Available at SSRN: https://ssrn.com/abstract=323920

Michael Lacina (Contact Author)

University of Houston-Clear Lake - School of Business ( email )

Houston, TX 77058
United States

Byung T. Ro

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-4512 (Phone)
765-494-9658 (Fax)

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