A comparison of alternative models for estimating firm’s growth rate

Ivan E. Brick (), Hong-Yi Chen (), Chia-Hsun Hsieh () and Cheng Few Lee
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Ivan E. Brick: Rutgers University
Hong-Yi Chen: National Chengchi University
Chia-Hsun Hsieh: National Central University

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 2, No 6, 369-393

Abstract: Abstract The growth rate plays an important role in determining a firm’s asset and equity values, nevertheless the basic assumptions of the growth rate estimation model are less well understood. In this paper, we demonstrate that the model makes strong assumptions regarding the financing mix of the firm. In addition, we discuss various methods to estimate firms’ growth rate, including arithmetic average method, geometric average method, compound-sum method, continuous regression method, discrete regression method, and inferred method. We demonstrate that the arithmetic average method is very sensitive to extreme observations, and the regression methods yield similar but somewhat smaller estimates of the growth rate compared to the compound-sum method. Interestingly, the ex-post forecast shows that arithmetic average method (compound-sum method) yields the best (worst) performance with respect to estimating firm’s future dividend growth rate. Firm characteristics, like size, book-to-market ratio, and systematic risk, have significant influence on the forecast errors of dividend and sales growth rate estimation.

Keywords: Equity valuation; Estimation of growth rate; Gordon’s growth model; Determinants of growth forecast errors (search for similar items in EconPapers)
JEL-codes: G31 G35 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-015-0504-6

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