Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Can A Hybrid Method Improve Equity Valuation?
T2 - An Empirical Evaluation of the Ohlson and Johannesson (2016) Model
AU - Gao, Zhan
AU - Myers, James
AU - Myers, Linda
AU - Wu, Wan-Ting
PY - 2019/11/1
Y1 - 2019/11/1
N2 - This paper investigates the validity and usefulness of “hybrid” valuation models. We recast the model in Ohlson and Johannesson (2016) as a hybrid of the Dividend Discount Model and an earnings-based price multiple model, and develop a new hybrid model that generalizes the Residual Income Valuation Model. After validating the theoretical properties of these models’ unique parameters, we assess the usefulness of the hybrid models in two applications. In application one, we find that intrinsic values from the hybrid models are more accurate than those from common discounted models or price multiple models. These improvements are attributable to the hybrid models’ ability to incorporate stock price and more realistic assumptions about growth. In application two, we find that the implied cost of equity from the hybrid models better captures systematic risks and key idiosyncratic risks, and captures expected returns. These results demonstrate the validity and usefulness of hybrid valuation models.
AB - This paper investigates the validity and usefulness of “hybrid” valuation models. We recast the model in Ohlson and Johannesson (2016) as a hybrid of the Dividend Discount Model and an earnings-based price multiple model, and develop a new hybrid model that generalizes the Residual Income Valuation Model. After validating the theoretical properties of these models’ unique parameters, we assess the usefulness of the hybrid models in two applications. In application one, we find that intrinsic values from the hybrid models are more accurate than those from common discounted models or price multiple models. These improvements are attributable to the hybrid models’ ability to incorporate stock price and more realistic assumptions about growth. In application two, we find that the implied cost of equity from the hybrid models better captures systematic risks and key idiosyncratic risks, and captures expected returns. These results demonstrate the validity and usefulness of hybrid valuation models.
KW - equity valuation
KW - discounted models
KW - price multiple models
KW - cost of equity
U2 - 10.2308/accr-52415
DO - 10.2308/accr-52415
M3 - Journal article
VL - 94
SP - 227
EP - 252
JO - The Accounting Review
JF - The Accounting Review
SN - 0001-4826
IS - 6
ER -