The performance of accounting-based valuation methods in the presence of dirty surplus flows, an empirical analysis and a practical insight on Broker’s reports

• Autor(a) principal: Martins, Nuno Maria Moura Tavares de Carvalho
• Data de Publicação: 2012
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/10590
• topic: Domínio/Área Científica::Ciências Sociais::Economia e Gestão

This dissertation analyzes the performance of accounting-based valuation methods in the presence of dirty surplus flows. We will first perform an empirical analysis on a large sample of U.S. companies between 2005 and 2010. This analysis compares the performance in terms of valuation errors of different accounting-based valuation methods (RIVM, AEGM and P/E) between two groups, with low and high level of dirty surplus flows. The study will show that P/E as the best accounting-based valuation method and it is independent of dirty surplus flows presence, while, RIVM was the second-best valuation method, followed by AEGM. The influence of dirty surplus flows is found in both RIVM and AEGM models. Particularly, the study reports that the longer the forecast horizon, the higher the valuation error AEGM would produce, in the presence of higher level of dirty surplus flows. Then a small sample of broker’s reports from FTSE 100 was studied. The study was divided in three parts; Studying the importance of dirty surplus for brokers, Practical insights about the valuation models used by brokers and Understanding the relevance of dirty surplus flows information to brokers. Brokers who introduce dirty surplus flow information in the valuation model, would, on average, use the DCF valuation model. However, the study concludes that the majority of brokers do not consider dirty surplus flow information. Finally, reports that incorporate dirty surplus flows information tend to achieve better performance. This dissertation presents JP Morgan reports as an example.