Empirical Testing of Parsimonious Equity Valuation Models: -

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This paper empirically evaluates the ability among different parsimonious equity valuation models to withstand factors causing valuation errors and to estimate the fair market value. The asset-based book value of owners’ equity and the discounted cash flow based capitalised earnings model are empirically evaluated along with the terminal value constrained versions of Residual Income Valuation and Abnormal Earnings Growth valuation models. Extended and altered versions of these models are also evaluated. The empirical testing is performed by estimating and comparing the valuation errors for a sample of publicly traded Swedish companies over the time period 1998-2007. The constrained versions of Residual Income Valuation and Abnormal Earnings Growth valuation models generally provide smaller absolute valuation errors than the book value and capitalised earnings respectively. Adjusting the Residual Income Valuation model for the valuation bias at the horizon point of time is found to be a feasible extension of the model under the provision that an accurate estimation of the valuation bias is available. Evaluating the Abnormal Earnings Growth valuation model against the Residual Income Valuation model shows that the abnormal earnings-based ...