An Accounting-Based Measure of Valuation Uncertainty

53 Pages Posted: 24 May 2021 Last revised: 22 Jul 2023

See all articles by Andrey Golubov

Andrey Golubov

University of Toronto - Rotman School of Management; European Corporate Governance Institute (ECGI)

Theodosia Konstantinidi

City University London - The Business School

Date Written: July 22, 2023

Abstract

Existing measures of valuation uncertainty are indirect or available for limited samples. We use an accounting-based valuation model to estimate uncertainty as reflected in the shape of the distribution of intrinsic equity values. Our measure is effective in summarizing the information in existing proxies and offers substantial incremental variation. Among numerous possible applications, we test the hypothesis that valuation uncertainty is conducive to valuation mistakes. We show that a value-like long-short strategy is particularly profitable among high valuation uncertainty stocks. Stocks in the short leg earn average returns indistinguishable from the risk-free rate – turning negative following periods of high investor sentiment – and their future earnings disappoint. Insiders trade against the presumed valuation mistakes. Overall, our paper demonstrates how accounting information can be used to summarize uncertainty about intrinsic equity value.

Keywords: Valuation uncertainty, residual income valuation, valuation mistakes, value premium

JEL Classification: M41, G12, G14

Suggested Citation

Golubov, Andrey and Konstantinidi, Theodosia, An Accounting-Based Measure of Valuation Uncertainty (July 22, 2023). Rotman School of Management Working Paper No. 3850807, Available at SSRN: https://ssrn.com/abstract=3850807 or http://dx.doi.org/10.2139/ssrn.3850807

Andrey Golubov (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/andrey-golubov

Theodosia Konstantinidi

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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