On the Development of an Efficient Deflator for the Estimation of Accounting-Based Valuation Models

27 Pages Posted: 30 Mar 2009 Last revised: 23 Sep 2009

See all articles by Juan M. García Lara

Juan M. García Lara

Universidad Carlos III de Madrid - Department of Business Administration

Christos A. Grambovas

Hellenic Open University

Martin Walker

University of Manchester - Manchester Business School

Date Written: 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.

JEL Classification: G12, M41, C50

Suggested Citation

García Lara, Juan Manuel and Grambovas, Christos A. and Walker, Martin, On the Development of an Efficient Deflator for the Estimation of Accounting-Based Valuation Models (April 17, 2009). Available at SSRN: https://ssrn.com/abstract=1369976 or http://dx.doi.org/10.2139/ssrn.1369976

Juan Manuel García Lara

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Christos A. Grambovas (Contact Author)

Hellenic Open University ( email )

Aristotelous 18
Patra, 26334
Greece

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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