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.
Highlights
Starting from the seminal work of Ball and Brown (1968), the association between the performance of financial markets and accounting information has attracted significant attention to various agents
The rationale behind this study is that different valuation models behave differently in certain contexts; in an emerging market such as Palestine exchange (PEX), how would accounting models and the market model perform in equity valuation and risk modeling? Given the theoretical equivalence between residual income (RIM) and the cash flow models, here we introduce the standard market model, which belongs to a different set of models, this study examines whether it is possible to consider a certain model as superior from investors’ perspective in explaining equity price, return and volatility
In the return-model (RIM version) in Table 9, equity return is explained by the two accounting ratios, BV/P and AR/P, both ratios are statistically significant, this means that firms with lower P/BV are undervalued and a certain premium is required by investors for investing in such firms, firms that generate higher abnormal return generate higher returns, as they can guarantee enough profits to compensate the cost of capital
Summary
Starting from the seminal work of Ball and Brown (1968), the association between the performance of financial markets and accounting information has attracted significant attention to various agents. Given the aim of the disclosed accounting figures is to provide. © Murad Harasheh, Andrea Amaduzzi and Fairouz Darwish. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
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