Improving stock valuations through the highest and best use principle
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This study investigates whether stock market valuations are consistent with the principle of highest and best use. Fixed-effects panel models are applied to a sample of 1,272 U.S. and European listed companies over the period 2014-2023. The findings indicate that using the highest and best use principle, that is, estimating intrinsic value per share using the higher of cost-based and income based valuations, provides greater explanatory power for stock prices than applying these valuation approaches individually. The analysis further shows that this effect is particularly pronounced in the technology sector. Overall, the results offer novel insights into how investor decision-making processes are reflected in stock price formation.
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