Examining the Dividend Growth Model for Stock Valuation: Evidence from Selected Stock on the Ghana Stock Exchange.

Abstract

Gordon’s growth model is one of the popular models in finance use to value or evaluate the fundamental values of stocks. This study investigated the actual price on the Ghana Stock Exchange with its predicted prices based on estimates using the Gordon’s growth model for the selected banks. Monthly returns and stock prices from the Databank Stock Index (DSI) for five years were used for this study.  T-test has been employed to test the significance of the mean differences for yearly market return for five years.

The findings of this study indicate that there are differences in the actual price series P_o and the estimated price series P_i based on estimates using the Gordon’s growth model. In other words, the current market prices of these banks do not match up with the actual fundamental values of these banks. The results from the t-test for all the selected banks collectively rejected the null hypothesis that there are no differences in the actual price series P_o, and the estimated price series P_i based on estimates using the Gordon’s growth model on the Ghana Stock Exchange.

The results also show that CAL banks’ share prices over the years studied by this paper have been undervalued and even as at the end of 2010, it was still undervalued. It further shows that Ghana Commercial Bank (GCB) was undervalued over the last four years but as at the end of 2010, it was overvalued. Home Finance Company (HFC) however was overvalued over the last four years and it was as at 2010, overvalued. Standard Chartered Bank (SCB) on the other hand was undervalued in 2006 but was overvalued for three subsequent years and as at 2010, it was overvalued. Société Générale – Social Security Banks, (SG-SSB) has experience a mixed trend. It was undervalued in 2006, overvalued in 2007 and 2008, undervalued in 2009 and it was overvalued as at the end of 2010. The results further indicate that the Ghana Stock Exchange (GSE) bourse is inefficient.

Key Words: Stock Market, Stock Index, Gordon’s Growth Model.