Abstract
In this paper, we test whether the short-run econometric conditions for the basic assumptions of the Ohlson valuation model hold, and then we relate these results with the fulfillment of the short-run econometric conditions for this model to be effective. Better future modeling motivated us to analyze to what extent the assumptions involved in this seminal model are not good enough approximations to solve the firm valuation problem, causing poor model performance. The model is based on the well-known dividend discount model and the residual income valuation model, and it adds a linear information model, which is a time series model by nature. Therefore, we adopt the time series approach. In the presence of non-stationary variables, we focus our research on US-listed firms for which more than forty years of data with the required cointegration properties to use error correction models are available. The results show that the clean surplus relation assumption has no impact on model performance, while the unbiased accounting property assumption has an important effect on it. The results also emphasize the uselessness of forcing valuation models to match the value displacement property of dividends.
Highlights
Following Biddle, Chen and Zhang [8] we propose an error correction model (ECM) of the econometric model derived from the Ohlson valuation model (OVM) to verify whether the short-run conditions implicit in the OVM hold for each firm
With respect to our main objective, the results show that while the clean surplus relation (CSR) assumption had no impact on OVM performance, the unbiased accounting property (UAP) assumption had an important effect on it
The slope parameters β 1 and β 2 were both positive and statistically significant in 93 and 219 firms, respectively. This result highlights the scarce relevance that the book value had in firm valuation; it was only significant in 38% of the cases, which contrasted with the prominent role that it had in the OVM, as the base of the valuation process from the residual income valuation model (RIM) in Equation (1), and in the abnormal earnings definition in Equation (4)
Summary
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. The Ohlson valuation model (OVM) [1] constitutes a starting point of accountingbased theoretical modeling of the firms’ value. In the literature previous to OVM, empirical research from an informative perspective focused on how financial data reported by companies being reflected by stock prices was usual. This purely empiricist research, far from being displaced by empirical works based on the emerging theoretical models since OVM, has continued to this day, sometimes misusing theoretical models to justify it
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