A Dynamic Model of Firm Valuation

43 Pages Posted: 11 May 2014 Last revised: 12 Apr 2017

See all articles by Natalia Lazzati

Natalia Lazzati

University of California, Santa Cruz

Amilcar Armando Menichini

Naval Postgraduate School

Date Written: February 2, 2017

Abstract

We propose a dynamic version of the dividend discount model, solve it in closed-form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are very close to market prices, and explains a large proportion (around 83%) of the observed variation in share prices. Moreover, we show that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns. These returns are uncorrelated with the three risk factors in Fama and French (1993).

Keywords: Firm Valuation, Dividend Discount Model, Gordon Growth Model, Dynamic Programming

JEL Classification: G31, G32

Suggested Citation

Lazzati, Natalia and Menichini, Amilcar Armando, A Dynamic Model of Firm Valuation (February 2, 2017). Available at SSRN: https://ssrn.com/abstract=2435328 or http://dx.doi.org/10.2139/ssrn.2435328

Natalia Lazzati

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

Amilcar Armando Menichini (Contact Author)

Naval Postgraduate School ( email )

Ingersoll Hall, Room 208
555 Dyer Road
Monterey, CA 93943
United States
831-656-2694 (Phone)

HOME PAGE: http://faculty.nps.edu/aamenich/index.html

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