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

Senthilnathan, Samithamby, Theoretical Role of the Most Recent Prior Period’s Equity Price in Value Relevance Studies (September 2, 2011). Journal for Advanced Research in Commerce and Management Studies, 2015, Volume 2, Issue 2, pp. 49-68, ISSN: 2394-837X, Available at SSRN: https://ssrn.com/abstract=1921647 or http://dx.doi.org/10.2139/ssrn.1921647

Samithamby Senthilnathan (Contact Author)

International Training Institute ( email )

PO Box 6322
Scratchley Road, Badili
Port Moresby, National Capital District
Papua New Guinea

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