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On the Development of an Efficient Deflator for the Estimation of Accounting-Based Valuation ModelsJuan Manuel García LaraUniversidad Carlos III de Madrid - Department of Business Administration Christos A. GrambovasUniversidad Carlos III de Madrid - Department of Business Administration Martin WalkerUniversity of Manchester - Manchester Business School April 17, 2009 Abstract: Previous research documents a number of potential scaling problems when estimating accounting based valuation models using cross-sectional data. The differences in size across observations cast doubts over the robustness of estimated coefficients and measures of fit. Several solutions have been proposed without reaching a consensus. We demonstrate analytically that, under certain conditions, the standard deviation of market capitalization changes is an efficient deflator for the cross-sectional estimation of Ohlson's (1995) unbiased accounting valuation model. Our empirical tests confirm this, as we show that the largest observations do not unduly affect the estimation results, the number of influential observations decreases notably and we obtain estimated coefficients not significantly different from the theoretical values derived from the Ohlson (1995) information dynamics.
Number of Pages in PDF File: 27 JEL Classification: G12, M41, C50 working papers seriesDate posted: March 30, 2009 ; Last revised: September 23, 2009Suggested CitationContact Information
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