Publications
Publications
- January 2022
- HBS Case Collection
Residual Income Valuation Model
By: Charles C.Y. Wang and Albert Shin
Abstract
This note explains the residual income valuation model (RIM), how it relates to "traditional" valuation models, the intuition behind its use, and empirical research related to its value relevance. RIM is theoretically equivalent to the dividend discount model and the discounted free cash flow model. However, it expresses future cash flows to equity in terms of accounting measures of capital (e.g., book value of equity) and performance (e.g., return on equity). Implementing the RIM requires forecasting the amount of expected future "economic profits," which depends on how business strategy plays out in the context of industry competitive dynamics, effective management of financial capital, and governance.
Keywords
Residual Income Valuation; Valuation; Research; Theory; Measurement and Metrics; Performance; Financial Management; Business Strategy
Citation
Wang, Charles C.Y., and Albert Shin. "Residual Income Valuation Model." Harvard Business School Background Note 122-070, January 2022.