A dynamic model of firm valuation
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Authors
Lazzati, Natalia
Menichini, Amilcar A.
Subjects
Firm valuation
Dividend Discount Model
Gordon Growth model
Dynamic programming
Dividend Discount Model
Gordon Growth model
Dynamic programming
Advisors
Date of Issue
2016-09
Date
Publisher
Language
Abstract
We propose a dynamic version of the dividend discount model, solve it in closed-form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are, on average, very close to market prices, and explains a large proportion (around 83%) of the observed variation in share prices. Moreover, we find that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns, on average. These returns are uncorrelated with the three risk factors in Fama and French (1993).
Type
Article
Description
Series/Report No
Department
Graduate School of Business and Public Policy (GSBPP)
Organization
Naval Postgraduate School (U.S.)
Identifiers
NPS Report Number
Sponsors
Center for Analytical Finance (CAFIN) US Santa Cruz
Funder
Format
40 p.
Citation
N. Lazzati, A.A. Menichini, "A dynamic model of firm valuation," The Financial Review, (Forthcoming), 2017.
Distribution Statement
Rights
This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.