On the Consistent Inference of the Economic Relation of the Residual Income Valuation Model

The Residual Earnings (RE) model has informed the capital market research over the last twenty years. To employ it in an empirical setting researchers commonly make extra assumptions about how future RE are related to and predicted by today's observed numbers. In this article, we show that the RE valuation relation can be estimated without a priori assumptions on exactly how observable data projects future earnings. The linkage between informative current values and expectations of future abnormal earnings is consistently inferred directly from the data. By letting the data speak we eliminate the risk of misspecifying the mechanism of expectation formation through unfitting assumptions