Some Refinements to the Stock Valuation Models Based on Accounting Variables

Abstract

Stock valuation has always been an enigma even for the most analytically equipped investor or fund manager because numerous factors determine the worth of a stock. A review of business periodicals suggests that valuation models are of interest to the investment community. Different models were proposed and are used by practitioners. This paper investigates the practical utility of two models-P/E and P/B. The study employs Seemingly Unrelated Regression (SUR) technique using BSE prices for the period 1996-2000. Results indicate that the converntional models need to be modified by including the current value drivers namely sales growth rate and Operating Profit Growth (OPG). The study finds that when OPG is included in the PEM model, the unexplained variation has reduced to a statistically significant extent, while sales growth and operating profit growth rate explain a significant portin of the variability in the P/B model.