Comparing the accuracy of dividend discount model, discounted cash flow model and residual income model

The main purpose of this thesis is to find out, which one of the absolute valuation models or these modifications is the most accurate valuation model. The final conclusion is based on various empirical tests of accuracy and bias in several different years and under different conditions. Previous studies have been quite univocal about the superiority of residual income valuation model (RIVM), but there are also exceptions and disagreements in the research field. I try to offer more comprehensive view about superiority of the valuation models based on tests in several different years and under different conditions, because different assumptions or economic conditions in different years may affect the results significantly. Additionally, the tests are implemented using more suitable samples for each of the models, to see how much the results improve and if the ranking order between the models would change. The final findings of this thesis indicate that the RIVM is clearly superior valuation model compared to dividend discount model (DDM), discounted cash flow model (DCFM) and two of these models' modifications according to accuracy. The results of this thesis are consistent with most of the previous studies (see e.g. Penman and Sougiannis 1998; Francis et al. 2000) where RIVM is seen superior in terms of accuracy compared to at least DCFM. In Addition, it is worth noticing that the results of this thesis are not completely undisputed and the exceptions in some years are possible, which mean that according to one or more measures it is possible that other valuation model than RIVM might be superior sporadically