Extended dividend, cash flow, and residual income valuation models: Accounting for deviations from ideal conditions

N. Heinrichs, D. Hess, C. Homburg, M. Lorenz, S. Sievers, Contemporary Accounting Research 30 (2013) 42–79.

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Journal Article | Published | English
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Abstract
Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital.
Publishing Year
Journal Title
Contemporary Accounting Research
Volume
30
Issue
1
Page
42-79
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Heinrichs N, Hess D, Homburg C, Lorenz M, Sievers S. Extended dividend, cash flow, and residual income valuation models: Accounting for deviations from ideal conditions. Contemporary Accounting Research. 2013;30(1):42-79. doi:10.2139/ssrn.1145201
Heinrichs, N., Hess, D., Homburg, C., Lorenz, M., & Sievers, S. (2013). Extended dividend, cash flow, and residual income valuation models: Accounting for deviations from ideal conditions. Contemporary Accounting Research, 30(1), 42–79. https://doi.org/10.2139/ssrn.1145201
@article{Heinrichs_Hess_Homburg_Lorenz_Sievers_2013, title={Extended dividend, cash flow, and residual income valuation models: Accounting for deviations from ideal conditions}, volume={30}, DOI={10.2139/ssrn.1145201}, number={1}, journal={Contemporary Accounting Research}, publisher={Wiley Online Library}, author={Heinrichs, Nicolas and Hess, Dieter and Homburg, Carsten and Lorenz, Michael and Sievers, Sönke}, year={2013}, pages={42–79} }
Heinrichs, Nicolas, Dieter Hess, Carsten Homburg, Michael Lorenz, and Sönke Sievers. “Extended Dividend, Cash Flow, and Residual Income Valuation Models: Accounting for Deviations from Ideal Conditions.” Contemporary Accounting Research 30, no. 1 (2013): 42–79. https://doi.org/10.2139/ssrn.1145201.
N. Heinrichs, D. Hess, C. Homburg, M. Lorenz, and S. Sievers, “Extended dividend, cash flow, and residual income valuation models: Accounting for deviations from ideal conditions,” Contemporary Accounting Research, vol. 30, no. 1, pp. 42–79, 2013.
Heinrichs, Nicolas, et al. “Extended Dividend, Cash Flow, and Residual Income Valuation Models: Accounting for Deviations from Ideal Conditions.” Contemporary Accounting Research, vol. 30, no. 1, Wiley Online Library, 2013, pp. 42–79, doi:10.2139/ssrn.1145201.

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