Relative Accuracy and Predictive Ability of Direct Valuation Methods, Price to Aggregate Earnings Method and a Hybrid Approach

23 Pages Posted: 20 Oct 2006

See all articles by Lucie Courteau

Lucie Courteau

Free University of Bozen-Bolzano - Faculty of Economics and Management

Jennifer L. Kao

Independent

Terry O'Keefe

University of Queensland - Accounting and Accountability; University of Oregon - Department of Accounting

Gordon D. Richardson

University of Toronto - Rotman School of Management

Abstract

In this paper, we assess the relative performance of the direct valuation method and industry multiplier models using 41 435 firm-quarter Value Line observations over an 11 year (1990-2000) period. Results from both pricing-error and return-prediction analyses indicate that direct valuation yields lower percentage pricing errors and greater return prediction ability than the forward price to aggregated forecasted earnings multiplier model. However, a simple hybrid combination of these two methods leads to more accurate intrinsic value estimates, compared to either method used in isolation. It would appear that fundamental analysis could benefit from using one approach as a check on the other.

Suggested Citation

Courteau, Lucie and Kao, Jennifer L. and O'Keefe, Terry and Richardson, Gordon D., Relative Accuracy and Predictive Ability of Direct Valuation Methods, Price to Aggregate Earnings Method and a Hybrid Approach. Accounting and Finance, Vol. 46, No. 4, pp. 553-575, December 2006, Available at SSRN: https://ssrn.com/abstract=938832 or http://dx.doi.org/10.1111/j.1467-629X.2006.00183.x

Lucie Courteau (Contact Author)

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Faculty of Economics and Management
Piazza Università 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

Jennifer L. Kao

Independent

Terry O'Keefe

University of Queensland - Accounting and Accountability ( email )

Brisbane 4072, Queensland
Australia

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

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