Empirical Evidence on Retail Firms’ Equity Valuation Models
International Research Journal of Finance and Economics ISSN 1450-2887 Issue 7 (2007) © EuroJournals Publishing, Inc. 2007 http://www.eurojournals.com/finance.htm
Empirical Evidence on Retail Firms’ Equity Valuation Models
Anastasia Vardavaki 13 Epidavrou str., Halandri, 152 33 Athens, Greece E-mail: anastasia_vardavaki@yahoo.gr John Mylonakis 10 Nikiforou str., Glyfada, 166 75 Athens, Greece E-mail: imylonakis@panafonet.r Abstract This paper presents the theoretical framework for the process of equity valuation and investigates the relative explanatory power of alternative linear equity valuation models when applied to firms in the UK food and drug retail sector. Due to practical difficulties in applying all valuation models, the empirical tests for the equity valuation are based on a) the asset-based model, which contains only book value as an independent variable; b) the earnings-based model, and c) the combined model, which contains both book value and current earnings or abnormal earnings as value-relevant variables. The results of the empirical analysis support precious studies that the combined valuation model is more informative by providing better and more accurate estimations of equity market values. This can be explained by the fact that this model incorporates both the economics and the accounting characteristics of the examined firms. Key words: Equity Valuation Models, Asset-Bards Model, Discounted Cash Flow Model, Discounted Residual Income, Equity Market Value JEL classification: G 380
1. Introduction
Fundamental analysis entails the use of information in current and past financial statements, in conjunction with industry and macroeconomic variables in order to determine the firm’s intrinsic value. To a fundamental analyst, the market equity price tends to move towards the fundamentalintrinsic value. A difference between the current and the intrinsic value is an indicator of the expected excess rewards for investing in the security. A large
Empirical Evidence on Retail Firms’ Equity Valuation Models
Anastasia Vardavaki 13 Epidavrou str., Halandri, 152 33 Athens, Greece E-mail: anastasia_vardavaki@yahoo.gr John Mylonakis 10 Nikiforou str., Glyfada, 166 75 Athens, Greece E-mail: imylonakis@panafonet.r Abstract This paper presents the theoretical framework for the process of equity valuation and investigates the relative explanatory power of alternative linear equity valuation models when applied to firms in the UK food and drug retail sector. Due to practical difficulties in applying all valuation models, the empirical tests for the equity valuation are based on a) the asset-based model, which contains only book value as an independent variable; b) the earnings-based model, and c) the combined model, which contains both book value and current earnings or abnormal earnings as value-relevant variables. The results of the empirical analysis support precious studies that the combined valuation model is more informative by providing better and more accurate estimations of equity market values. This can be explained by the fact that this model incorporates both the economics and the accounting characteristics of the examined firms. Key words: Equity Valuation Models, Asset-Bards Model, Discounted Cash Flow Model, Discounted Residual Income, Equity Market Value JEL classification: G 380
1. Introduction
Fundamental analysis entails the use of information in current and past financial statements, in conjunction with industry and macroeconomic variables in order to determine the firm’s intrinsic value. To a fundamental analyst, the market equity price tends to move towards the fundamentalintrinsic value. A difference between the current and the intrinsic value is an indicator of the expected excess rewards for investing in the security. A large
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