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Relative accuracy and predictive ability of direct valuation methods, price to aggregate earnings method and a hybrid approach

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  • Lucie Courteau
  • Jennifer L. Kao
  • Terry O’Keefe
  • Gordon D. Richardson

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

  • Lucie Courteau & Jennifer L. Kao & Terry O’Keefe & Gordon D. Richardson, 2006. "Relative accuracy and predictive ability of direct valuation methods, price to aggregate earnings method and a hybrid approach," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(4), pages 553-575, December.
    • Handle: RePEc:bla:acctfi:v:46:y:2006:i:4:p:553-575
    DOI: 10.1111/j.1467-629X.2006.00183.x
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    References listed on IDEAS

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    1. Bandyopadhyay, Sati P. & Brown, Lawrence D. & Richardson, Gordon D., 1995. "Analysts' use of earnings forecasts in predicting stock returns: Forecast horizon effects," International Journal of Forecasting, Elsevier, vol. 11(3), pages 429-445, September.
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    4. Lucie Courteau & Jennifer L. Kao & Gordon D. Richardson, 2001. "Equity Valuation Employing the Ideal versus Ad Hoc Terminal Value Expressions," Contemporary Accounting Research, John Wiley & Sons, vol. 18(4), pages 625-661, December.
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    Cited by:

    1. Bixia Xu & Michel L. Magnan & Paul E. André, 2007. "The Stock Market Valuation of R&D Information in Biotech Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1291-1318, December.

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