An Empirical Assessment of the Valuation Accuracy of The Abnormal Earnings Growth Valuation Model

This paper examines the relative valuation accuracy of the abnormal earnings growth valuation model (Ohlson and Juettner-Nauroth, 2005; the OJ model) and the residual income valuation model (Ohlson, 1995; the RIV model). We find that the OJ model generally underperforms the RIV model in terms of valuation accuracy. Increasing the forecast horizon for the OJ model from two to five years significantly improves the valuation accuracy, but the valuation accuracy of the OJ model with the five-year forecast horizon is still worse than that of the RIV model. Our further analysis suggests that the assumptions of the OJ model on future earnings growth beyond the forecast horizon might not be valid for predicting future ROE and thus could result in the low valuation accuracy.