Testing the Building Blocks of the Ohlson-Feltham-Ohlson Models

29 Pages Posted: 24 Apr 2014 Last revised: 23 Oct 2014

See all articles by Mariano Gonzalez-Sanchez

Mariano Gonzalez-Sanchez

Universidad CEU Cardenal Herrera

Juan M. Nave

Universidad de Castilla - La Mancha

David Toscano

University of Liverpool; University of Huelva

Date Written: April 14, 2014

Abstract

We analyze the empirical pattern of the Ohlson models (1995) focusing on four basic implicit assumptions that support the model: (i) the displacement property, (ii) the goodness of book value as a proxy of the ability of assets and liabilities to generate cash flows, (iii) the conservatism correction value, and (iv) the clean surplus relation. We test the long-term equilibrium relations on the Dow Jones Composite Index companies, using an Error Correction Model when non-stationary variables are present and a cointegration relation exists. The results show that for only slightly more than 10% of the companies we cannot simultaneously reject the four assumptions.

Keywords: Stationarity, Cointegration, Companies Valuation, Ohlson-Feltham-Ohlson Models

JEL Classification: M40; G14; M10

Suggested Citation

Gonzalez-Sanchez, Mariano and Nave, Juan M. and Toscano, David, Testing the Building Blocks of the Ohlson-Feltham-Ohlson Models (April 14, 2014). Available at SSRN: https://ssrn.com/abstract=2428382 or http://dx.doi.org/10.2139/ssrn.2428382

Mariano Gonzalez-Sanchez

Universidad CEU Cardenal Herrera ( email )

Luis Vives,1
Elche, Valencia
Spain

HOME PAGE: http://www.uch.ceu.es

Juan M. Nave

Universidad de Castilla - La Mancha ( email )

Facultad de Ciencias Sociales
Avda. de los Alfares, 44
CUENCA, CUENCA 16071
Spain

David Toscano (Contact Author)

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

University of Huelva ( email )

Huelva
Spain

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