Traditional versus Clean-Surplus Valuation Models: Evidence from U.K. Stocks

Abstract

Early theoretical work on equity valuation suggests that equity prices are a function of such variables as dividends and growth in dividends. Over the past few years the clean-surplus valuation approach has rekindled interest in empirical valuation models. This article employs panel data methodology and uses equity prices from the London Stock Exchange to compare empirically the performance of the traditional and the more-recent models of equity valuation. On the whole, the results show that the performance of the traditional valuation model is similar to that of the clean-surplus valuation model.