Empirical Applications of the Ohlson [1995] and
Feltham and Ohlson [1995, 1996] Valuation
Models
by Thomas L. Stober, Associate Professor of Accountancy, Notre Dame
Abstract
The influential papers by Ohlson [1995] and Feltham and Ohlson [1995, 1996] contain
valuation models that provide structure for empirical work on the relation between equity
values and (current) accounting numbers. Empirical applications of these models include
policy-oriented studies as well as direct tests of these models. This paper reviews these ap
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plications and considers directions that such applications are likely to take in the future.
1. Introduction
Papers by Ohlson [1995] and Feltham and Ohlson [1995, 1996] develop a rigorous theory
of valuation in terms of accounting numbers. In his commentary on the Ohlson [1995] and
Feltham and Ohlson [1995, 1996] papers, Bernard [1995] identifies two contributions of
these studies that could affect the direction of empirical work. The first contribution was
subtle - a shift in the ultimate objective of research on the relation between accounting data
and firm value away from explaining stock price behavior in favor of more work on predict-
ing future earnings and future growth in book value, attributes that are identified as impor-
tant in these models. The second contribution was more concrete - the use of these models
as a point of departure for empirical work, to guide researchers in structuring the relation
between accounting data and firm value. This paper focuses on the second contribution. Its
objectives are to review empirical applications of the Ohlson [1995] and Feltham and Ohl-
son [1995, 1996] models and to consider the directions such applications are likely to take
in the future.
To limit the scope, I consider here only applications of the Ohlson [1995] and Feltham
and Ohlson [1995, 1996] models that pertain to the relation between value and current ac
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counting numbers, as opposed to models of the relation between value and expected future
accounting numbers. To derive the relation between value and current accounting numbers,
Ohlson [1995] and Feltham and Ohlson [1995, 1996] assume accounting numbers evolve
according to some linear model. Some recent studies that focus the role of book values in
representing the value of the firm under liquidation or abandonment and end up with ex
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pressions that look very similar to the Ohlson [1995] and Feltham and Ohlson [1995, 1996]
models, for example, Burgsthahler and Dechev [1996] and Barth, Beaver, and Landsman
[1998], are beyond the scope of this paper. Similarly, studies such as Dechow, Hutton, and
Sloan [1998] which examine residual income valuation but contain assumptions that can
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not be reconciled with the Ohlson [1995] or Feltham and Ohlson [1995, 1996] models are
not considered.
1
The rest of this paper is organized as follows. The Ohlson [1995] model is considered
first. Key features of that model are described in section 2 and empirical applications of that
model are then reviewed in section 3. These same issues are taken up in sections 4 and 5, re
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Volume 25 Number 12 1999 3