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Residual Income versus Discounted Cash Flow Valuation Models: An Empirical Study

Valuation plays a central role in the financing, investing and operating decisions of companies and many methods are employed to approximate the true value of a company. Although these techniques are based on similar theory, they may generate different results in application. This study incorporates an empirical approach to compare the outcomes of two different methods: residual income and discounted cash flow valuation models. The aim of this study is to test whether these methods result in different values and to contribute to the understanding of why these two valuation techniques, although similar in theory, may generate different results when applied to real life companies. There are a number of studies that compare these two methods theoretically. Some studies claim the superiority of one method over the other and some argue that these two methods should yield the same results when applied properly. In this study, the residual income and discounted cash flow models are applied to nine Turkish companies and the results are compared. We have obtained the data for the study with site visits to the companies and with the help of the managements of the companies.