IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-13-00010.html
   My bibliography  Save this article

Cash flow, earnings, and dividends: A comparison between different valuation methods for Brazilian companies

Author

Listed:
  • Cesar Cupertino

    (Federal University of Santa Catarina (UFSC))

  • Newton Da Costa

    (Federal University of Santa Catarina (UFSC))

  • Reinaldo Coelho

    (State University of Santa Catarina (UDESC))

  • Emilio Menezes

    (Federal University of Santa Catarina (UFSC))

Abstract

This paper compares three valuation models – discounted dividends, discounted cash flow, and residual earnings – using financial and accounting data from Brazilian companies, during the period of 1995 to 2004. These approaches should be theoretically equivalent when the respective companies' payoffs are predicted to infinity, but in practice they require predictions over finite horizons. So, the objective of the present study is to assess how these three models perform in finite horizon analysis and in a different financial and economic context. The conclusion was that, among the three models, the cash flow approach presented the best accuracy and explanatory power, having the current stock price as the parameter of comparison. It also had the largest number of valuations considered acceptable. This conclusion diverges from that obtained by some studies performed in other countries like the U.S. (Francis et al., 2000, Penman and Sougiannis, 1998, and Courteau et al., 2000).

Suggested Citation

  • Cesar Cupertino & Newton Da Costa & Reinaldo Coelho & Emilio Menezes, 2013. "Cash flow, earnings, and dividends: A comparison between different valuation methods for Brazilian companies," Economics Bulletin, AccessEcon, vol. 33(1), pages 309-322.
    • Handle: RePEc:ebl:ecbull:eb-13-00010
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I1-P30.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chong, Alberto E. & López-de-Silanes, Florencio, 2007. "Corporate Governance in Latin America," IDB Publications (Working Papers) 1596, Inter-American Development Bank.
    2. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    3. Plenborg, Thomas, 2002. "Firm valuation: comparing the residual income and discounted cash flow approaches," Scandinavian Journal of Management, Elsevier, vol. 18(3), pages 303-318, September.
    4. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    5. Francis, J & Olsson, P & Oswald, DR, 2000. "Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 45-70.
    6. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Corporate Governance in Latin America," Research Department Publications 4494, Inter-American Development Bank, Research Department.
    7. Art Durnev & E. Han Kim, 2005. "To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation," Journal of Finance, American Finance Association, vol. 60(3), pages 1461-1493, June.
    8. Stephen H. Penman & Theodore Sougiannis, 1998. "A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(3), pages 343-383, September.
    9. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    10. Minardi A. & Sanvicente, A. S., 1998. "A liquidez é Relevante no Mercado de Ações?," Finance Lab Working Papers flwp_6, Finance Lab, Insper Instituto de Ensino e Pesquisa.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. César Medeiros Cupertino & Paulo Roberto Barbosa Lustosa, 2004. "Ohlson Model Testability:Empirical Tests Findings," Brazilian Business Review, Fucape Business School, vol. 1(2), pages 136-150, June.
    2. Karel Janda, 2019. "Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(1), pages 37-75, February.
    3. Bassam M. ABU-ABBAS, 2021. "The Role of Dividends on Equity Valuation: Evidence from the GCC Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 162-180, June.
    4. Gil Sadka, 2007. "Understanding Stock Price Volatility: The Role of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 45(1), pages 199-228, March.
    5. Khaled Aljifri & Hafiz Imtiaz Ahmad, 2019. "Preferred Valuation Techniques in the UAE: A Comparative Study of Financial and Nonfinancial Sectors," International Journal of Economics and Financial Issues, Econjournals, vol. 9(1), pages 51-59.
    6. Maximiliano González & Alexander Guzmán & Diego Fernando Tellez & María Andrea Trujillo, 2016. "What you say and how you say it: Information disclosure in Latin American firms," Documentos de Trabajo de Valor Público 15656, Universidad EAFIT.
    7. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    8. Lee, King Fuei, 2010. "Retail minority shareholders and corporate reputation as determinant of dividend policy in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 18(4), pages 351-368, September.
    9. Jeremiah Green & John R. M. Hand & X. Frank Zhang, 2016. "Errors and questionable judgments in analysts’ DCF models," Review of Accounting Studies, Springer, vol. 21(2), pages 596-632, June.
    10. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    11. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    12. Janda, Karel & Kaszas, Micha, 2017. "Indirect Firm Valuation and Earnings Stability," MPRA Paper 77234, University Library of Munich, Germany.
    13. Mohamed Sellami, 2006. "Typologie des déterminants comptables de la valeur : Apports de l'approche économique de l'information dans la mesure de la valeur," Post-Print halshs-00558252, HAL.
    14. Husted, Bryan W. & Sousa-Filho, José Milton de, 2019. "Board structure and environmental, social, and governance disclosure in Latin America," Journal of Business Research, Elsevier, vol. 102(C), pages 220-227.
    15. Imam, Shahed & Chan, Jacky & Shah, Syed Zulfiqar Ali, 2013. "Equity valuation models and target price accuracy in Europe: Evidence from equity reports," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 9-19.
    16. Coelho, Antonio Carlos & Galdi, Fernando Caio & Lopes, Alexsandro Broedel, 2017. "Determinants of asymmetric loss recognition timeliness in public and private firms in Brazil," Emerging Markets Review, Elsevier, vol. 31(C), pages 65-79.
    17. Doron Nissim & Stephen H. Penman, 2003. "The Association between Changes in Interest Rates, Earnings, and Equity Values," Contemporary Accounting Research, John Wiley & Sons, vol. 20(4), pages 775-804, December.
    18. Heinrichs, Nicolas & Hess, Dieter & Homburg, Carsten & Lorenz, Michael & Sievers, Soenke, 2011. "Extended dividend, cash flow and residual income valuation models: Accounting for deviations from ideal conditions," CFR Working Papers 11-11, University of Cologne, Centre for Financial Research (CFR).
    19. Gutiérrez, Luis H. & Pombo, Carlos, 2009. "Corporate ownership and control contestability in emerging markets: The case of Colombia," Journal of Economics and Business, Elsevier, vol. 61(2), pages 112-139.
    20. Iris Bergmann & Wolfgang Schultze, 2018. "Accounting based valuation: a simultaneous equations model for forecasting earnings to proxy for ‘other information’," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1057-1091, May.

    More about this item

    Keywords

    discounted dividend model; residual earnings model; discounted cash flow model;
    All these keywords.

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-13-00010. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.