Discerning the Determinants of Common Stock Valuation: An Empirical Analysis

Abstract

This empirical study combines the fundamental intrinsic-value theory with the modern-portfolio theory to help discern the main determinants of common-stock valuation. This study differs from previous studies in that a simulated ex ante, controlled valuation-experiment is performed: for each dividend-paying firm in a cross-sectional sample alternately employed in a stock-valuation model are first, actual dividends; and then second, a measure representing the dividend-paying-ability of the firm. For each alternative strategy a set of results is generated, then generalised and a comparison is made to see which strategy works best. An analysis-ofvariance and a comparison-of-forecast-errors respectively indicate that a dividend-paying-ability measure (1) has greater informational content and (2) generally leads to better price appraisal when employed in a valuation model.