Comparisons of residual income model and growth value model

Both the Residual Income Model (RIM) and Growth Value Model (GVM) combine the income-based approach and asset-based approach, and blend with the market-based approach, which employs regression analysis and market data to determine parameters in the models. Hence, they have more comprehensiveness tha...

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Bibliographic Details
Published inApplied economics Vol. 56; no. 11; pp. 1327 - 1345
Main Author Yeh, I-Cheng
Format Journal Article
LanguageEnglish
Published London Routledge 02.03.2024
Taylor & Francis Ltd
Subjects
Economic analysis
Economic theory
Growth
mean reversion
Residuals
stock price
valuation model
value
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Summary:Both the Residual Income Model (RIM) and Growth Value Model (GVM) combine the income-based approach and asset-based approach, and blend with the market-based approach, which employs regression analysis and market data to determine parameters in the models. Hence, they have more comprehensiveness than most approaches in the literature. The theoretical and empirical comparisons of RIM and GVM may have profound meaning to stock intrinsic value. The theoretical comparison shows that the ROE-P/B relationship is linear in RIM and power in GVM. When ROE equals the required return rate, whosever P/B is 1.0. When the ROE is small, the P/B estimated by GVM is still greater than 0; however, it may be negative by RIM, which is not reasonable. In a normal range (0 ~ 20%) of ROE, the two curves are rather close to each other. The empirical study showed that the GVM can more reasonablly fit the market data, especially when the ROE is rather small or great.
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ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2023.2176448