Residual Income Valuation (RIV-EBO) and Book-to-Market ratio (B/P): essays on the predictive power for stock returns on B3
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2023-05-30
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Mattos, Enlinson
Colombo, Jéfferson Augusto
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This thesis is composed of two essays which are empirical studies in finance. The essays center on the empirical comparison of the predictive power for stock returns of a residual income model using analyst earnings forecasts (RIV-EBO model) and of a book-to-market ratio (B/P) strategy in the Brazilian market. The first essay examines the contribution of the RIV-EBO model to explain stock returns relative to B/P in the local market. We document a resilient relationship between the models and the similarity of returns in high-ratio portfolios in all investment periods, yet the RIV-EBO model reveals a safety quality attribute when portfolio sorting is used. We show that the models are alike in explaining the overall sample firms’ returns in the short term, with the RIV-EBO model signaling, nonetheless, a greater predictive power for returns in the long term. Building upon these findings, the second essay investigates the quality of analyst earnings forecasts in the Brazilian market from a RIV-EBO model perspective. We document local analysts’ higher forecast errors compared to the U.S. market suggesting that local financial signals not necessarily have the same relevance as observed in that market. We also show that the search for significantly enhancing the predictive power for returns of the RIV-EBO model in the local market requires the improvement in the quality of analyst earnings forecasts and the adoption of additional trading strategies potentially exploiting B/P and analyst optimism (OP) as firm’s predicted forecast error explanatory variables.
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Residual income valuation model (RIV) Fundamental and intrinsic value Financial signals Book-to-market ratio Predictive power for stock returns Analyst earnings forecasts Analyst forecast errors Value/glamour effect Market efficiency Mispricing Edwards-Bell-Ohlson (EBO) Modelo de avaliação pelo lucro residual (RIV) Valor fundamental e intrínseco Sinais contábeis-financeiros Razão patrimônio líquido sobre valor de mercado Previsibilidade de retorno de ações Previsão de lucro de analistas Previsão de erros de analistas Efeito valor/crescimento Eficiência de mercado