The pricing accuracy of the unbiased RIV model

Abstract: This paper aims to investigate whether the pricing accuracy of the RIV model is improved with unbiased accounting. The introduction of the Feltham-Ohlson model has left researchers with an eagerness to propose a RIV model with high pricing accuracy. While prior researchers within the field have dedicated their attention to the effects stemming from the choice of value driver, length of explicit forecast horizon and horizon value, the effects stemming from the accounting itself has been left unanswered. We introduce an unbiased RIV model, neutralised from any accounting policy, and compare its pricing accuracy with the base RIV model. Our unbiased RIV model is derived by assessing firm-specific accounting measurement bias for each firm in our data sample, comprising listed firms in the Nordics. Our results show that the pricing accuracy of the RIV model is consistently higher with unbiased accounting. Thus, we find that the pricing accuracy is improved with the unbiased RIV model regardless of model adjustments and across industries, countries and valuation time periods evaluated in this paper. Moreover, our research shows that the pricing accuracy of the RIV model changes in different valuation settings, which bring valuable insights for practitioners of the RIV model. We evaluate the size of measurement bias as the driving cause for this and find that the largest incremental improvements in the pricing accuracy of the unbiased RIV model appear in valuation settings where the accounting measurement bias is inherently higher.