The Feltham-Ohlson (1995) Model: Empirical Implications

20 Pages Posted: 25 Oct 1999

See all articles by Jing Liu

Jing Liu

The Cheung Kong Graduate School of Business

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Abstract

This paper develops empirical implications of the Feltham and Ohlson [1995] model which relates a firm's market value to accounting data and their expected realizations. The key issue concerns how one conceptualizes/measures a firm's expected growth to explain its market value when the model also includes more basic accounting measures reflecting its current performance. It is shown that market value can be expressed in terms of, (i), financial assets (liabilities) with a coefficient of one, (ii), the expected change in operating earnings with a non-negative coefficient, (iii), the expected operating earnings with a positive coefficient, (iv), current (net) operating assets with a non-negative coefficient, and, (v), the expected change in (net) operating assets with a non-negative coefficient. One identifies the measure of a firm's expected growth by normalizing the last variable with current (net) operating assets. The variable will be relevant if and only if the accounting is conservative.

JEL Classification: M41, G12

Suggested Citation

Liu, Jing and Ohlson, James A., The Feltham-Ohlson (1995) Model: Empirical Implications. Available at SSRN: https://ssrn.com/abstract=180452 or http://dx.doi.org/10.2139/ssrn.180452

Jing Liu

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza
E3/3F
Beijing
China

James A. Ohlson (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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