A Study of Equity Valuation Models: Evidence from German Companies

Abstract

This paper aims to test the accuracy for the period 1990 to 2006 of three well-known equity valuation models. This is done to a sample of German listed firms which diverge from the US market in accounting standards, market maturity and corporate governance culture as well as differing market movements and trends which influence main input factors and estimations. To the best of our knowledge this is the first paper to address this issue for a sample of listed firms from the largest bank-based European economy. Using different accuracy measures such as absolute prediction error (average, median and central tendency) the results show that dividend discounted and abnormal earnings models tend to provide better accuracy than the free cash flow approach. Additionally we find evidence of the importance of German accounting standards in the less accuracy performance of the abnormal earnings model compared to previous studiesdue to the conservative accounting and the influence of hidden reserves. Finally we did not find any significant valuation differences regarding the alternative values used for growth and discount rates.