A Fundamentalist Perspective on Reverse Engineering in Equity Valuation

41 Pages Posted: 7 Dec 2020 Last revised: 6 Aug 2021

See all articles by Bernd Huefner

Bernd Huefner

Friedrich Schiller University Jena, Faculty of Economics and Business Administration

Marcel Rueenaufer

Friedrich Schiller University Jena, Faculty of Economics and Business Administration

Date Written: August 6, 2021

Abstract

This paper reviews literature on reverse engineering in equity valuation from the perspective of a fundamental investor. Despite a history of over 80 years, the literature on reverse engineering shows no clear consensus on the modelling, conceptualisation and operationalisation of the technique. Moreover, the literature often includes ad-hoc, speculative assumptions that put many empirical results in question if treated transparently. We derive a new assessment framework for applied reverse engineering in accounting-based equity valuation from the perspective of a fundamental investor. Based on the framework, we find that there is no approach to reverse engineering that sufficiently fulfils the needs of fundamental investors in the literature. In search of a remedy, we derive a model based on the Ohlson (1995) model that is tailored to reverse engineering and complements a more extensive fundamental analysis. We further provide implications of our insights for investors and identify potential directions of future research based on these insights, e.g. stock screening.

Keywords: Reverse Engineering, Residual Income Valuation, Financial Statement Analysis, Fundamental Investor, Value Investing

JEL Classification: M41, G11, G12, G14, G17, G32

Suggested Citation

Huefner, Bernd and Rueenaufer, Marcel, A Fundamentalist Perspective on Reverse Engineering in Equity Valuation (August 6, 2021). Available at SSRN: https://ssrn.com/abstract=3542496 or http://dx.doi.org/10.2139/ssrn.3542496

Bernd Huefner

Friedrich Schiller University Jena, Faculty of Economics and Business Administration ( email )

Germany

Marcel Rueenaufer (Contact Author)

Friedrich Schiller University Jena, Faculty of Economics and Business Administration ( email )

Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
176
Abstract Views
713
rank
233,901
PlumX Metrics