Relative accuracy and predictive ability of direct valuation methods, price to aggregate earnings method and a hybrid approach |
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| Authors: | Lucie Courteau Jennifer L Kao Terry O'Keefe Gordon D Richardson |
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| Institution: | School of Economics and Management, Free University of Bolzano, 39100, Bolzano, Italy; Department of Accounting and Management Information Systems, University of Alberta, Edmonton, T6G 2R6, Canada; Department of Accounting, University of Oregon, Eugene, 97403-1208, USA and Commerce Department, University of Queensland, Brisbane, 4072, Australia; Joseph L. Rotman School of Management, University of Toronto, Toronto, M5S 3E6, Canada |
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| 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. |
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| Keywords: | Direct valuation Hybrid approach Price–earnings ratio |
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