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A fractional cointegration approach to testing the Ohlson accounting based valuation model

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  • Shih-Cheng Lee
  • Chien-Ting Lin
  • Min-Teh Yu

Abstract

We examine the long-run relationship between market value, book value, and residual income in the Ohlson (Contemp Acc Res 11(2):661–687, 1995 ) model. In particular, we test if market value is cointegrated with book value and residual income in light of their non-stationary behaviors. We find that cointegration applies to only 51 % of the sample firms, casting doubt that book value and residual income alone are adequate in tracking variations in market value, yet we find that market value is fractional cointegrated with book value and residual income for 89 % of the sample firms. This implies that the long-run relationship follows a slow but mean-reverting process. Our results therefore support the Ohlson model. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Shih-Cheng Lee & Chien-Ting Lin & Min-Teh Yu, 2013. "A fractional cointegration approach to testing the Ohlson accounting based valuation model," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 535-547, October.
    • Handle: RePEc:kap:rqfnac:v:41:y:2013:i:3:p:535-547
    DOI: 10.1007/s11156-012-0321-0
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    3. Chen-Yin Kuo, 2017. "Is the accuracy of stock value forecasting relevant to industry factors or firm-specific factors? An empirical study of the Ohlson model," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 195-225, July.
    4. Arturo Leccadito & Stefania Veltri, 2015. "A regime switching Ohlson model," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(5), pages 2015-2035, September.

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    More about this item

    Keywords

    Accounting based valuation; The Ohlson model; Value relevance; Residual income; Book value; G17; M40;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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