Faculty Publications

Title

An empirical test of the accounting-based residual income model and the traditional dividend discount model

Document Type

Article

Journal/Book/Conference Title

Journal of Business

Volume

78

Issue

4

First Page

1465

Last Page

1504

Abstract

Given the failure of the conventional dividend discount model to explain volatile, dynamic stock price movements, we test the empirical validity of an alternative model, the accounting-based residual income model (RIM), which posits that the current stock price equals the current book value of equity plus the present value of expected future residual income. We test two implications of the two models: volatility of prices relative to fundamentals and the model's dynamic implications by cross-equation restrictions. We find that, for stock valuation, book values and accounting earnings in the RIM contain more useful information than dividends alone. © 2005 by The University of Chicago. All rights reserved.

Original Publication Date

7-1-2005

DOI of published version

10.1086/430866

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