Fundamental Relations between Market and Accounting Values

38 Pages Posted: 14 Feb 2015

See all articles by Victoria Clout

Victoria Clout

School of Accounting, Auditing & Taxation, UNSW Business School, UNSW Australia; Hanken Centre for Corporate Governance

Michael Falta

University of Otago

Roger J. Willett

Victoria University of Wellington - Te Herenga Waka - Victoria Business School

Date Written: February 12, 2015

Abstract

This study examines the implied underlying relation between market and accounting values in a long-run time-series approach based on error correction principles. Recent studies have suggested problems with the current approaches to linear valuation modelling (Ohlson and Kim, 2015). The results this study show that firm market values show slight mean-reversionary characteristics, i.e. returning to a long term level. Economy-wide equity values, through the index, show a significant short-run relationship with individual firm market values but none of the Ohlson-type model accounting variables of book value, earnings and dividends show the same level of short-run explanatory ability for firm market values. Of these four explanatory variables, only dividends show a clear ability to predict firm market value one period ahead. Reported earnings exhibit quite strong mean reversion, suggesting the possibility of earnings management. The implications for testing the Ohlson-Penman theory of market value are also discussed.

Keywords: Capital market research, Multiplicative returns models, Value relevance, Time series models, Fundamental analysis, Error correction

JEL Classification: C22, C52, G10, G32, M41

Suggested Citation

Clout, Victoria and Falta, Michael and Willett, Roger J., Fundamental Relations between Market and Accounting Values (February 12, 2015). UNSW Business School Research Paper No. 2015ACCT01, Available at SSRN: https://ssrn.com/abstract=2564412 or http://dx.doi.org/10.2139/ssrn.2564412

Victoria Clout (Contact Author)

School of Accounting, Auditing & Taxation, UNSW Business School, UNSW Australia ( email )

Sydney, NSW, NSW 2052
Australia
+6193856957 (Phone)

Hanken Centre for Corporate Governance ( email )

Hanken School of Economics
Helsinki
Finland

Michael Falta

University of Otago ( email )

60 Clyde Street
Dunedin
New Zealand

Roger J. Willett

Victoria University of Wellington - Te Herenga Waka - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

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