From dividend yield to discounted cash flow: a history of UK and US equity valuation techniques

Author: Rutterford J.

Source: Accounting, Business & Financial History, Volume 14, Number 2, July 2004 , pp. 115-149(35)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

This article explores how, as capital markets developed, equity valuation methods changed. The history of equity valuation is described, from its early origins during the South Sea Bubble, through the new issue boom of the nineteenth century and the stock market booms of the 1920s and 1950s. The moves from dividend yield and asset backing, to earnings yield and then P/E ratios are chronicled. The article compares developments in the UK and the US, in particular the relative slowness of the UK market to adopt US-pioneered techniques such as the P/E ratio, the concept of value versus growth stocks, and using intrinsic value to determine whether shares are cheap or dear. The article concludes with a discussion of the relatively slow introduction of the dividend discount model and of discounted cash flow as equity valuation tools on both sides of the Atlantic.

Keywords: history of valuation; dividend yield; P/E ratio; intrinsic value; discounted cash flow

Document Type: Research article

DOI: 10.1080/0958520042000225745

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