Stock Returns Predictive Power Based on Residual Income Valuation Model

摘要

Based on the data of A-share listed companies on the Chinese stock market in 1996-2006, this paper makes empirical investigation on the power of the Feltham-Ohlson’s residual income valuation model in predicting future cross-sectional stock returns. When calculating “composite income” to calculate the internal value of stocks based on residual income valuation model, the residual income model shows significantly higher predictive power and higher stability than other variables, which can thus lead to the conclusion that the residual income valuation model can well forecast future stock returns and its predictive power gets stronger over longer horizons (beyond 12 months) and remains effective after some related factors are controlled.