Empirical Investigation of the Ohlson Model: The Case of Taiwan

Abstract

This study applies the panel cointegration method to test the Ohlson (1995) model. Sample firms are chosen from seven listed industries in Taiwan during the period from the second quarter of 1990 to the third quarter of 2005. The analysis focuses on whether the fundamental value cointegrates with firm market value. The results support the cointegration hypothesis that a long-term equilibrium relationship exists between firm fundamental value and market value. This study then assesses the predictive power of the Ohlson model for future assessment of market value. Since the Ohlson model is based on the dividend discount model, this study also examines the validity and the predictive power of the dividend discount model for comparison. The results demonstrate that the Ohlson model can forecast future stock price movements much more accurately than the dividend discount model for all prediction horizons.