IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v16y2001i3p191-203.html
   My bibliography  Save this article

Linear Accounting Valuation When Abnormal Earnings Are AR(2)

Author

Listed:
  • Callen, Jeffrey L
  • Morel, Mindy

Abstract

The Ohlson (1995) model assumes that abnormal earnings follow an AR(1) process primarily for reasons of mathematical tractability. However, the empirical literature on the Garman and Ohlson (1980) model finds that the data support an AR(2) lag structure for earnings, book values and dividends. Moreover, the AR(2) process encompasses a far richer variety of time series patterns than does the AR(1) process and includes the AR(1) process as a special case. This paper solves the Ohlson model directly for an AR(2) abnormal earnings dynamic. The model is estimated on a time series firm-level basis following the approach used by Myers (1999). It is found that, like the Ohlson AR(1) model, the Ohlson AR(2) model severely underestimates market prices even relative to book values. These results further bring into question the empirical validity of the Ohlson model. Copyright 2001 by Kluwer Academic Publishers

Suggested Citation

  • Callen, Jeffrey L & Morel, Mindy, 2001. "Linear Accounting Valuation When Abnormal Earnings Are AR(2)," Review of Quantitative Finance and Accounting, Springer, vol. 16(3), pages 191-203, May.
    • Handle: RePEc:kap:rqfnac:v:16:y:2001:i:3:p:191-203
    as

    Download full text from publisher

    File URL: http://journals.kluweronline.com/issn/0924-865X/contents
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jeffrey L. Callen, 2016. "Accounting Valuation and Cost of Equity Capital Dynamics," Abacus, Accounting Foundation, University of Sydney, vol. 52(1), pages 5-25, March.
    2. Hanlon, Michelle & Myers, James N. & Shevlin, Terry, 2003. "Dividend taxes and firm valuation:: a re-examination," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 119-153, June.
    3. Christian Blecher, 2019. "The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 47-72, July.
    4. Atoche, Teresa duarte & Pérez lópez, José ángel & Camúñez ruiz, Jose antonio, 2012. "La relevancia de los gastos de I+D. Estudio empírico en el sector del automóvil," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 15(2), pages 257-286.
    5. Iris Bergmann & Wolfgang Schultze, 2018. "Accounting based valuation: a simultaneous equations model for forecasting earnings to proxy for ‘other information’," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1057-1091, May.
    6. Lanter, David & Hirsch, Stefan & Finger, Robert, 2018. "Profitability and Competition in EU Food Retailing," 2018 Annual Meeting, August 5-7, Washington, D.C. 274202, Agricultural and Applied Economics Association.
    7. Hossein Etemadi & Forough Rahimi Mougouie, 2015. "Firms Life Cycle and Ohlson Valuation Model: Evidence from Iran," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(4), pages 641-652, April.
    8. Clout, Victoria J. & Willett, Roger J., 2016. "Earnings in firm valuation and their value relevance," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(3), pages 223-240.
    9. Duarte Atoche Teresa & Pérez López José Ángel & Camúñez Ruíz José Antonio, 2012. "Información sobre I+D y valoración de empresas," Contaduría y Administración, Accounting and Management, vol. 57(4), pages 107-136, octubre-d.
    10. Callen, Jeffrey L., 2015. "A selective critical review of financial accounting research," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 26(C), pages 157-167.
    11. Arturo Leccadito & Stefania Veltri, 2015. "A regime switching Ohlson model," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(5), pages 2015-2035, September.
    12. Mindy Morel, 2003. "Endogenous Parameter Time Series Estimation of the Ohlson Model: Linear and Nonlinear Analyses," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9‐10), pages 1341-1362, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:16:y:2001:i:3:p:191-203. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.