The Effects of Residual Income, Free Cash Flow to Equity, and Book Values on Firms' Market Values: An Empirical Study on the ISE

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Hakkı Öztürk: Bahçeşehir University

Journal of Finance Letters (Maliye ve Finans Yazıları), 2010, vol. 25, issue 89, 49-72

Abstract: This study compares the theoretical valuation methods which are Residual Income (RI), Free Cash Flow to Equity (FCFE), and Book Value (BV) with respect to firms’ market value. An empirical model which is conducted mainly for a group of manufacturing companies listed on the Istanbul Stock Exchange (ISE) uses the panel data regression and analyzes the question of how the theoretical models explain the market value of the firms and determines which model affects the market value of the firms the most. According to results, the theoretical valuation models named as RI, FCFE and BV are all in a significant and strong relationship with the market value. The market values of the firms are explained by the three valuation models almost in the same degree. However, the residual income that the firms create, affects the market values more than BV and FCFE. The companies listed on the ISE can increase their market values by increasing their RI, BV and FCFE. Nevertheless, it has to be noted that firms can increase their market value more and consequently create greater value for their shareholders by focusing on RI.

Keywords: Residual Income; Free Cash Flow to Equity; Book Value; Market Value (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:acc:malfin:v:25:y:2010:i:89:p:49-72

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