An empirical evaluation of using the residual income model for prediction of stock price

Abstract

The use of fundamental analysis can be regarded as one of the effective tools to predict changes in stock prices. The residual income model is considered among the effective models for fundamental analysis. The purpose of this study is to predict stock prices by such a model. Therefore a sample of 87 companies listed on the Tehran Stock Exchange was selected, and the results of this study indicate the potential of this model. They showed a significant relationship between the current stock price and calculated price by use of a residual income model and the book value of stock. Furthermore, it can be concluded that in predicting stock prices, the ratio of the price calculated by the residual income model to the current stock price is more appropriate, in comparison to the ratio of the book value to the current price of stock. Key words: Residual income model, intrinsic value, book value, fundamental analysis.