Reconciling Value Estimates from the Discounted Cash Flow Model and the Residual Income Model*

Russell Lundholm and Terry O'Keefe

Contemporary Accounting Research, 2001, vol. 18, issue 2, 311-335

Abstract: This paper examines why practitioners and researchers get different estimates of equity value when they use a discounted cash flow (CF) model versus a residual income (RI) model. Both models are derived from the same underlying assumption — that price is the present value of expected future net dividends discounted at the cost of equity capital — but in practice and in research they frequently yield different estimates. We argue that the research literature devoted to comparing the accuracy of these two models is misguided; properly implemented, both models yield identical valuations for all firms in all years. We identify how prior research has applied inconsistent assumptions to the two models and show how these seemingly small errors cause surprisingly large differences in the value estimates.

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
https://doi.org/10.1506/W13B-K4BT-455N-TTR2

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:18:y:2001:i:2:p:311-335

Access Statistics for this article

More articles in Contemporary Accounting Research from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().