The relevance of valuation models: insights from Palestine exchange

Murad Harasheh, Andrea Amaduzzi and Fairouz Darwish

International Journal of Islamic and Middle Eastern Finance and Management, 2020, vol. 13, issue 5, 827-845

Abstract: Purpose - This paper aims to investigate the relevance of two groups of valuations models as follows: the accounting models based on the residual income (RIM) and the standard market model, on equity price, return and volatility relevance. Design/methodology/approach - The models are tested on companies traded on Palestine exchange from 2009 to 2018, using panel regression analysis. Two-price and two-return models derived from RIM to compare with the market model and four volatility models. Findings - The standard RIM outperformed other models in equity price modeling. The dividend discount model (DDM) outperformed the rest of the models in terms of return estimation. However, the authors find that the market model can explain equity variance better than RIM and DDM models. Practical implications - For investors, market beta does not necessarily capture all relevant factors of value and traditional financial statements are still important in providing relevant information and different models are used for different values perspectives (price, return and volatility). Originality/value - Previous studies focus on comparing the price and return relevance of accounting-based models (RIM and cash flow models). Three aspects differentiate this paper and contribute to its originality, namely, the uniqueness of the context, incorporating the market model into the picture along with the accounting-based models and adding Volatility dimensions of relevance.

Keywords: Residual income model; Firm valuation; Abnormal return; Market model; Palestine exchange; Stock return volatility (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-08-2019-0367

DOI: 10.1108/IMEFM-08-2019-0367

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