Fundamental Relations between Market and Accounting Values

Abstract

This study examines the implied underlying relation between market and accounting values in a long-run time-series approach based on error correction principles. Recent studies have suggested problems with the current approaches to linear valuation modelling (Ohlson and Kim, 2015). The results this study show that firm market values show slight mean-reversionary characteristics, i.e. returning to a long term level. Economy-wide equity values, through the index, show a significant short-run relationship with individual firm market values but none of the Ohlson-type model accounting variables of book value, earnings and dividends show the same level of short-run explanatory ability for firm market values. Of these four explanatory variables, only dividends show a clear ability to predict firm market value one period ahead. Reported earnings exhibit quite strong mean reversion, suggesting the possibility of earnings management. The implications for testing the Ohlson-Penman theory of market value are also discussed.