An Empirical Test of the Feltham-Ohlson (1995) Model

Publication Type

Journal Article

Publication Date

2005

Abstract

This paper tests the Feltham–Ohlson (1995) model by transforming the undefined “other information” variables into expectational variables, as suggested by Liu and Ohlson [Liu and Ohlson (2000). Journal of Accounting, Auditing and Finance 15, 321–331]. The signs of the estimated coefficients conform to the model’s predictions using panel data techniques, non-parametric estimation, reverse regressions and portfolio regressions. The tests reject the Ohlson model in favor of Feltham–Ohlson. Nevertheless, the estimated leverage coefficient takes a value of three instead of one for most variations of the model. Also, the 1-year-ahead price predictions of the Feltham–Ohlson model are no more accurate than those of the Ohlson model or a naive earnings valuation model.

Keywords

Feltham–Ohlson, equity valuation, conservatism, net operating assets, growth

Discipline

Accounting | Corporate Finance

Research Areas

Financial Intermediation and Information

Publication

Review of Accounting Studies

Volume

10

Issue

4

First Page

409

Last Page

429

ISSN

1380-6653

Identifier

10.1007/s11142-005-4208-3

Publisher

Springer

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