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.
Review of Accounting Studies – Springer Journals
Published: Aug 19, 2005
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