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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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    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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