Cash flow, earnings, and dividends: A comparison between different valuation methods for Brazilian companies

This paper compares three valuation models – discounted dividends, discounted cash flow, and residual earnings – using financial and accounting data from Brazilian companies, during the period of 1995 to 2004. These approaches should be theoretically equivalent when the respective companies' payoffs are predicted to infinity, but in practice they require predictions over finite horizons. So, the objective of the present study is to assess how these three models perform in finite horizon analysis and in a different financial and economic context. The conclusion was that, among the three models, the cash flow approach presented the best accuracy and explanatory power, having the current stock price as the parameter of comparison. It also had the largest number of valuations considered acceptable. This conclusion diverges from that obtained by some studies performed in other countries like the U.S. (Francis et al., 2000, Penman and Sougiannis, 1998, and Courteau et al., 2000).