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Empirical Tests of the Feltham–Ohlson (1995) Model

Author

Listed:
  • Jeffrey L. Callen

    (University of Toronto)

  • Dan Segal

    (University of Toronto)

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.

Suggested Citation

  • Jeffrey L. Callen & Dan Segal, 2005. "Empirical Tests of the Feltham–Ohlson (1995) Model," Review of Accounting Studies, Springer, vol. 10(4), pages 409-429, December.
    • Handle: RePEc:spr:reaccs:v:10:y:2005:i:4:d:10.1007_s11142-005-4208-3
    DOI: 10.1007/s11142-005-4208-3
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    References listed on IDEAS

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    1. Joy Begley & Gerald A. Feltham, 2002. "The Relation between Market Values, Earnings Forecasts, and Reported Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 1-48, March.
    2. Dechow, Patricia M. & Hutton, Amy P. & Sloan, Richard G., 1999. "An empirical assessment of the residual income valuation model1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 1-34, January.
    3. Abarbanell, JS & Bushee, BJ, 1997. "Fundamental analysis, future earnings, and stock prices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 35(1), pages 1-24.
    4. 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.
    5. 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.
    6. Philip Shane & Peter Brous, 2001. "Investor and (Value Line) Analyst Underreaction to Information about Future Earnings: The Corrective Role of Non‐Earnings‐Surprise Information," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(2), pages 387-404, September.
    7. Beaver, William H., 1999. "Comments on 'An empirical assessment of the residual income valuation model'," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 35-42, January.
    8. Feltham, GA & Ohlson, JA, 1996. "Uncertainty resolution and the theory of depreciation measurement," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34(2), pages 209-234.
    9. 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.
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    Cited by:

    1. Adam Esplin & Max Hewitt & Marlene Plumlee & Teri Lombardi Yohn, 2014. "Disaggregating operating and financial activities: implications for forecasts of profitability," Review of Accounting Studies, Springer, vol. 19(1), pages 328-362, March.
    2. Matthew R. Lyle & Jeffrey L. Callen & Robert J. Elliott, 2013. "Dynamic risk, accounting-based valuation and firm fundamentals," Review of Accounting Studies, Springer, vol. 18(4), pages 899-929, December.

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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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