Determining Financial Performance: Evidence from UK and USA Firms

Hamadi, Hassan and Awdeh, Ali (2011): Determining Financial Performance: Evidence from UK and USA Firms. Published in: International Research Journal of Finance and Economics No. 72 (August 2011): pp. 115-135.

Abstract

This paper tests the Residual Income model empirically using data from both USA and UK. The results show that the Residual Income model can, to a significant degree, capture cross-sectional variation in stock market price of the sample over a significant period of time. However, the model is considered a valuation model. Therefore we propose two ways to determine firm performance. The first is use the first difference from the Residual Income model with correction for dividend namely first difference between Vt and Vt-1 (adding back dividend at time t) represents firm performance. The second is based on the argument that the actual value created in a certain period of time consists of earnings (including dividend) over and above the cost of capital employed, which is the Residual Income Component (RIC) of the Residual income model. These two performance models were empirically tested and compared. The results revealed that the RIC model is able to capture stock price returns performance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Residual Income model; Discount Cash Flow; Financial Performance.
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G35 - Payout Policy

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