Estimating the magnitude of the MV-IV gap: empirical evidence

Berg, M. Douglas; Stretcher, Robert
July 2010
Journal of Finance & Accountancy;Jul2010, Vol. 3, p1
Academic Journal
This paper documents the magnitude of deviation of common stock market values from intrinsic values estimated using the constant growth dividend valuation model. The constant growth model is widely accepted as a fundamental building block of valuation, and is taught to virtually all undergraduate business students. It is widely accepted as the method by which investors determine the amount they are willing to bid for a share of common stock, based on expected dividend amounts and growth, and their individual required returns. An earlier study (Stretcher-Berg 2004) used aggregated segment data to show that substantial deviations occur between calculated intrinsic values and actual market values (the MV-IV gap). This paper extends that work, estimating the magnitude of the MV-IV gap.


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