Book Values, Earnings, and Market Valuations
50 Pages Posted: 15 Nov 2002
Date Written: November 2002
This article develops a family of stock valuation models that are based on book values and earnings. The modeling approach can be consistent with a large class of allowable dividend policies and does not require an explicit forecast of future book values. Reconciling empirical evidence, the model determined expected rate of return is related to book-to-market and earnings yield. Model implementation using S&P 500 stocks yields several empirical results. First, the performance yardsticks indicate that the models show promise in explaining market valuations. Second, both book and earnings considerations are crucial in stock valuation. Finally, zero-dividend and negative earnings stocks present no particular valuation hurdles with reasonable goodness-of-fit statistics.
Note: Previously titled "Stock Valuation: The Role of Book Values and Earnings"
Suggested Citation: Suggested Citation