The residual income model cannot challenge the discounted cash flow method in stock valuations - an analysis of global manufacturing and service companies Online publication date: Fri, 29-Oct-2021
by Andras Takacs; Edina C. Erb
International Journal of Sustainable Economy (IJSE), Vol. 13, No. 4, 2021
Abstract: The residual income model (RIM) exists in the literature as a theoretical concept for almost a hundred years, however, it could never match the popularity and relevance of the discounted cash flow (DCF) approach in the valuation practice. In the last few decades, residual income gained attention again. Studies examined its ability to explain stock prices, especially in comparison with the DCF model. The ambiguous results obtained give space for further research. In this study, we analyse panel data of 40 global manufacturing and service companies from the period 2013-2019. Our results indicate that the RIM is unable to match the DCF model in terms of explanatory power on stock prices, which is observable for both manufacturing and service firms. We also find that, with appropriate adjustments based on the Preinreich-Lücke theory, the DCF model's statistical relevance improves remarkably, although this improvement is more significant for service companies.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Sustainable Economy (IJSE):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com
Our Blog 
Follow us on Twitter 
Visit us on Facebook