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<p>This study examines the Growth Value Model (GVM), which explores the relationship between a company’s return on equity (ROE) and its price-to-book value ratio (PBR). The GVM posits that the PBR is influenced by two key coefficients: the growth coefficient, representing the potential for earnings growth, and the value coefficient, reflecting the intrinsic worth of the firm. Previous research has primarily estimated the growth coefficient directly by using regression analysis with observed ROE and PBR data. However, according to the theoretical framework of the GVM, an alternative approach is to estimate the persistence of ROE, as indicated by its tendency to revert to a mean over time, and use this persistence to calculate the growth coefficient indirectly. Using financial data from all publicly listed companies in Taiwan from 2000 to 2016, this study finds several key results. First, ROE demonstrates a mean-reversion behavior characterized by an exponential decay pattern. Second, lower volatility in ROE is associated with higher persistence, indicating that stable earnings enhance predictability. Third, the persistence of ROE varies across industries, with more stable sectors exhibiting stronger persistence. Fourth, while the growth coefficients derived from direct and indirect methods differ in magnitude, their relative trends remain consistent across varying levels of ROE volatility and across industries. Finally, the growth coefficient estimated indirectly provides an objective valuation of profitability persistence and intrinsic value, largely independent of market sentiment. In contrast, the direct method captures market investors’ subjective assessment, which is more likely influenced by external sentiment and speculative factors.</p>

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Stock valuation model based on mean reversion of return on equity

  • 期刊论文

  • 发表日期：

    2025年7月26日

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  • I.-Cheng Yeh,
  • Wei-Sheng Chi

摘要

This study examines the Growth Value Model (GVM), which explores the relationship between a company’s return on equity (ROE) and its price-to-book value ratio (PBR). The GVM posits that the PBR is influenced by two key coefficients: the growth coefficient, representing the potential for earnings growth, and the value coefficient, reflecting the intrinsic worth of the firm. Previous research has primarily estimated the growth coefficient directly by using regression analysis with observed ROE and PBR data. However, according to the theoretical framework of the GVM, an alternative approach is to estimate the persistence of ROE, as indicated by its tendency to revert to a mean over time, and use this persistence to calculate the growth coefficient indirectly. Using financial data from all publicly listed companies in Taiwan from 2000 to 2016, this study finds several key results. First, ROE demonstrates a mean-reversion behavior characterized by an exponential decay pattern. Second, lower volatility in ROE is associated with higher persistence, indicating that stable earnings enhance predictability. Third, the persistence of ROE varies across industries, with more stable sectors exhibiting stronger persistence. Fourth, while the growth coefficients derived from direct and indirect methods differ in magnitude, their relative trends remain consistent across varying levels of ROE volatility and across industries. Finally, the growth coefficient estimated indirectly provides an objective valuation of profitability persistence and intrinsic value, largely independent of market sentiment. In contrast, the direct method captures market investors’ subjective assessment, which is more likely influenced by external sentiment and speculative factors.