The Informativeness of Financial Accounting Data for Emerging Growth Firms: An Application of the Feltham-Ohlson Model

Posted: 27 Apr 1998

See all articles by Ervin L. Black

Ervin L. Black

Steed School of Accounting

Betty M. Chavis

California State University, Fullerton - Mihaylo College of Business & Economics

Richard G. Elmendorf

University of Wyoming - College of Business - Department of Economics and Finance

Date Written: Undated

Abstract

This study investigates the informativeness of financial accounting variables for emerging growth firms using a model based on the theoretical work of Feltham and Ohlson (1995), and empirically adapted by Ou and Penman (1993) and Bernard (1995). The model tests the association between a measure of future performance (future return on equity) and earnings, cash flow variables, and other financial accounting variables. The robustness of the results are further tested through sensitivity analysis by excluding outliers and utilizing industry classification and the age of the firm as delineators. The results, when combined with the results of Amir and Lev (1995) and Black (1995), increase our knowledge of the usefulness of financial accounting for firms in this early life-cycle stage. This prior research provided evidence that financial accounting data is of limited informativeness for early stage growth firms in the telecommunications industry (Amir and Lev) and start-up firms (Black). The empirical results support the efficiency contracting theory and provide evidence that reported financial accounting data are informative about future performance of emerging growth firms. In addition, the results are stronger when outliers are excluded, and when industry and age associations are considered.

JEL Classification: G12, M41

Suggested Citation

Black, Ervin L. and Chavis, Betty M. and Elmendorf, Richard G., The Informativeness of Financial Accounting Data for Emerging Growth Firms: An Application of the Feltham-Ohlson Model (Undated). Available at SSRN: https://ssrn.com/abstract=2718

Ervin L. Black (Contact Author)

Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-2401 (Phone)

Betty M. Chavis

California State University, Fullerton - Mihaylo College of Business & Economics ( email )

P.O. Box 6848
Fullerton, CA CA 92834-6848
United States
(714) 278 3937 (Phone)

Richard G. Elmendorf

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
(307)766-4028 (Phone)

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