Accuracy of the Residual Income Valuation Model in Stock Price Measurement

A Study on Coal Mining Industry Issuers in the Indonesia Stock Exchange

Abstract

This research was conducted to evaluate the accuracy of Residual Income Valuation Model (RIVM) in the valuation of coal mining industry stocks in Indonesia. The study compared the results of the RIV model with other valuation models, such as Discounted Cash Flow (DCF) and Enterprise Value/EBITDA (EV/EBITDA) multiples, using three accuracy measurement tools: bias, accuracy, and squared error. The research findings indicate that RIVM dominates DCF in terms of accuracy and squared error measures but fails in the bias measurement tool. In comparison with EV/EBITDA multiples, RIVM fails in the bias measurement tool and produces values that tend to be similar in the accuracy and squared error measurement tools. Based on these research findings, it can be concluded that RIVM has its own advantage in predicting stock prices compared to DCF, with valuation values that are low level of significant errors. Additionally, the use of RIVM and EV/EBITDA multiples can still be interchangeably applied, depending on industry characteristics that are being valued.