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The Feltham-Ohlson (1995) Model: Empirical Implications

91 citations0/0 files storedJournal of Accounting Auditing & Finance

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Financial Reporting and Valuation Research Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting

Abstract

This paper develops empirical implications of the Feltham and Ohlson (1995) model, which relates a firm's market value to accounting data and their expected realizations. The key issue concerns how one conceptualizes/measures a firm's expected growth to explain its market value when the model also includes more basic accounting measures reflecting its current performance. It is shown that market value can be expressed in terms of (1) financial assets (liabilities) with a coefficient of 1, (2) the expected change in operating earnings with a nonnegative coefficient, (3) the expected operating earnings with a positive coefficient, (4) current (net) operating assets with a nonnegative coefficient, and (5) the expected change in (net) operating assets with a positive coefficient. One identifies the measure of a firm's expected growth by normalizing the last variable with current (net) operating assets. The variable will be relevant if and only if the accounting is conservative.

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References

1995Earnings, Book Values, and Dividends in Equity Valuation*1995Valuation and Clean Surplus Accounting for Operating and Financial Activities*1999Have Financial Statements Lost Their Relevance?1997Changes in the value-relevance of earnings and book values over the past forty years 1999An empirical assessment of the residual income valuation model 1999Use of R2 in accounting research: measuring changes in value relevance over the last four decades 1994The Accounting Based Valuation of Corporate R&D 2001Earnings, Book Values, and Dividends in Equity Valuation: An Empirical Perspective

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