A COMPARISON OF FORECAST ACCURACY AMONG STOCK PRICING MODELS: EVIDENCE FROM MALAYSIAN LISTED COMPANIES
Keywords:
Forecast accuracy, Stock pricing modelsAbstract
Discovering the best model that is able to predict equity values that most closely approximate the actual equity values observed in the market place has always been an area of concern for financial analysts and other stakeholders. This paper tackles this issue by comparing various stock valuation models in terms of their relative forecast accuracy in the Malaysia context. The findings reveal that PE (Price-to-Earnings) model produced the lowest mean absolute forecast error for the overall sample companies as well as in the perspective of large firm size. The results indicate that PE model generally outperforms DGM (Dividend Growth) model and OCF (Operating Cash Flow) model and hence conclude that PE model is the most robust model among stock pricing models. As such, all stakeholders should focus more on information conveyed by earnings in order to enhance their forecast of stock prices.
Downloads
References
Borde, S. F., Byrd, A. K., & Atkinson, S. M. (1999). Stock price reaction to dividend increases in the hotel and restaurant sector. Journal of Hospitality & Tourism Research, 23(1), 40-52.
Clement, M. B. (1999). Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter? Journal of Accounting and Economics, 27(3), 285-303.
Courteau, L., Kao, J., & Richardson, G. D. (2001). The equivalence of dividend, cash flows and residual earnings approaches to equity valuation employing ideal terminal valuem expressions. Contemporary Accounting Research, 18(4), 625-661.
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25, 383-417.
Fama, E. F., & French, K. R. (1988). Dividend yields and expected stock returns. Journal of Financial Economics, 22, 3-25.
Francis, J., Olsson, P., & Oswald, D. R. (2000). Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates. Journal of Accounting Research, 38(1), 45-70.
Goetzmann, W. N., & Jorion, P. (1993). Testing the predictive power of dividend yields. Journal of Finance, 48(2), 663-679.
Gordon, M. J. (1959). Dividends, earnings and stock prices. The Review of Economics and Statistics, 41(2), 99-105.
Graham, B., & Dodd, D. L. (1934). Security Analysis. New York: Mc-Graw Hill.
Imbarine, B., & Annuar, M.D. (2007). The relevance of Gordon’s model and earnings multiplier approaches in emerging stock market: Test with appropriate refinements. International Research Journal of Finance and Economics, 7, 140-152.
Jokipii, A., & Vahamaa, S. (2006). The free cash flow anomaly revisited: Finnish evidence. Journal of Business Finance and Accounting, 33, 1-18.
Lamont, O. (1998). Earnings and expected returns. Journal of Finance, 53(5), 1563-1587.
Lundholm, R., & O’Keefe, T. (2001). Reconciling value estimates from the discounted cash flow model and the residual income model. Contemporary Accounting Research, 18(2), 311-335.
McCluskey, T., Burton, B. M., Power, D. M., & Sinclair, C. D. (2006). Evidence on the Irish stock market reaction to dividend announcement. Journal of Applied Financial Economics, 16, 617-628.
Penman, S. H., & Sougiannis, T. (1998). A comparison of dividend, cash flow, and earnings approaches to equity valuation. Contemporary Accounting Research, 343-384.
Shiller, R. J. (1984). Stock prices and social dynamics. Brookings Papers on Economic Activity, 2, 457-498.
Stickel, S. E. (1990). Predicting individual analyst earnings forecast. Journal of Accounting Research, 28(2), 409-417.
Tee, P. L., & Ng, K. K. (2009). Forecast accuracy of dividend growth model and price earnings ratio model on Malaysian stocks. Journal of the Malaysian Institute of Certified Public Accountants, 11-16.
Yardeni, E. (2003). Stock Valuation Model (4.1). Prudential Financial Research.
