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An Empirical Test of the Accounting-Based Residual Income Model and the Traditional Dividend Discount Model

  • Xiaoquan Jiang

    (University of Northern Iowa)

  • Bon-Soo Lee

    (College of Business, Florida State University)

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    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.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB780411
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    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 78 (2005)
    Issue (Month): 4 (July)
    Pages: 1465-1504

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    Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1465-1504
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

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