Theoretical Role of the Most Recent Prior Period’s Equity Price in Value Relevance Studies
Journal for Advanced Research in Commerce and Management Studies, 2015, Volume 2, Issue 2, pp. 49-68, ISSN: 2394-837X
32 Pages Posted: 4 Sep 2011 Last revised: 7 Oct 2016
Date Written: September 2, 2011
Abstract
This paper uses the Ohlson (1995) model and other related literature to theoretically demonstrate that the empirical specification of value relevance models with current or next period’s equity price as the dependent variable can be vastly improved when they utilize the most recent prior period’s equity price as an additional explanatory variable. The explanation further indicates that value relevance studies that use the Ohlson (1995) model should employ change in price or else returns, not the price level, as the dependent variable. These improvements to the empirical specification are shown to be important when past share price is highly correlated with important information that affects future earnings. This study reformulates the Ohlson (1995) value relevance model to demonstrate how it accommodates the most recent prior period equity price as an additional explanatory variable and also demonstrates how the earnings-based value relevance regression model equations can be used to improve the empirical specification for investigating the value relevance of an accounting variable.
Keywords: accounting, earnings, equity price, price change, value relevance
JEL Classification: M41, M49, G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Information Perspective and Usefulness of Accounting Information
-
Acquisition-Related Provision-Taking and Post-Acquisition Performance in the UK Prior to Frs 7
By Stephen Brown, Ole-kristian Hope, ...
-
NAFTA and Convergence in North America: High Expectations, Big Events, Little Time
By William Easterly, Norbert M. Fiess, ...
-
Equity Market Integration in the NAFTA Region: Evidence from Unit Root and Cointegration Tests
By Raj Aggarwal and Nyo Nyo A. Kyaw
-
Management Ownership and Firm's Value: An Empirical Analysis Using Panel Data
By Sang-mook Lee and Keunkwan Ryu
-
Mean Reversion in Stock Prices in an Emerging Market: Sri Lankan Evidence
-
Does an End of Period's Accounting Variable Assessed have Relevance for the Particular Period?
-
The Efficient Market, Random Walk, and the Ohlson (1995) Model