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Alternative Methods for Estimating Firm’s Growth Rate: Update and Extension

In: Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes

Author

Listed:
  • Ivan E. Brick
  • Hong-Yi Chen
  • Chia-Hsun Hsieh
  • Cheng Few Lee

Abstract

The growth rate plays an important role in determining a firm’s asset and equity values. The premier model used to price equity is the basic dividend growth model of Gordon and Shapiro (1956). Nevertheless, the basic assumptions of the growth rate estimation model are less well understood. In this paper, we demonstrate that the model makes strong assumptions regarding the financing mix of the firm. In addition, we discuss various estimation methods of the firms’ growth rate. We demonstrate that the arithmetic average method is very sensitive to extreme observations, and the regression methods yield similar but somewhat smaller estimates of the growth rate compared to the compound-sum method. Interestingly, the ex post forecast shows that arithmetic average and compoundsum methods (continuous regression) yield the best (worst) performance with respect to estimating a firm’s future dividend growth rate. Firm characteristics, like size, book-to-market ratio, and systematic risk, have a significant influence on the forecast errors of dividend and sales growth rate estimation.

Suggested Citation

  • Ivan E. Brick & Hong-Yi Chen & Chia-Hsun Hsieh & Cheng Few Lee, 2024. "Alternative Methods for Estimating Firm’s Growth Rate: Update and Extension," World Scientific Book Chapters, in: Cheng Few Lee & Alice C Lee & John C Lee (ed.), Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes, chapter 13, pages 451-481, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811269943_0013
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    Keywords

    Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G3 - Financial Economics - - Corporate Finance and Governance

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