Abstract

The main purpose of this research is to empirically test the validity of the clean surplus valuation model for Canadian public companies. The empirical results of this research confirm the high explanation power of the clean surplus model in predicting stock prices for Canadian public companies and support the use of the clean surplus model as a proxy for intrinsic firm value. Profitable trading strategies are successfully constructed based on the intrinsic values suggested by the model. It is evident that under-priced portfolios identified by the model consistently yield higher returns than other portfolios for all different holding periods. This research proves that the clean surplus valuation model provides a criteria that is both theoretically sound and empirically valid. By comparing the theoretical values with associated market prices, one can effectively construct profitable trading strategies by using fundamental variables and market values of mispriced stocks will eventually move toward their intrinsic values