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A Dynamic Model of Firm Valuation

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  • Natalia Lazzati
  • Amilcar A. Menichini

Abstract

We propose a dynamic version of the dividend discount model, solve it in closed form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are very close to market prices, and explains a large proportion of the observed variation in share prices. Moreover, we show that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns. These returns cannot be simply explained either by the Fama‐French three‐factor model (even after adding a momentum factor) or the Fama‐French five‐factor model.

Suggested Citation

  • Natalia Lazzati & Amilcar A. Menichini, 2018. "A Dynamic Model of Firm Valuation," The Financial Review, Eastern Finance Association, vol. 53(3), pages 499-531, August.
    • Handle: RePEc:bla:finrev:v:53:y:2018:i:3:p:499-531
    DOI: 10.1111/fire.12164
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    Cited by:

    1. Fei Xu & Mian Yang & Qiangyi Li & Xiaolei Yang, 2020. "Long‐term economic consequences of corporate environmental responsibility: Evidence from heavily polluting listed companies in China," Business Strategy and the Environment, Wiley Blackwell, vol. 29(6), pages 2251-2264, September.

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