Accounting Conservatism and the Valuation of Accounting Numbers: Evidence on the Feltham-Ohlson (1996) Model

22 Pages Posted: 6 Nov 1998

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Richard M. Morton

Florida State University - Department of Accounting

Thomas F. Schaefer

University of Notre Dame - Department of Accountancy

Abstract

This study documents evidence on the valuation effects of accounting conservatism in the context of the Feltham-Ohlson [1996] model. We find, consistent with the model's predictions, that goodwill (the difference between market and book value of equity) is a function of abnormal operating earnings and beginning operating assets. Our test results support two further implications of the FO model: (1) the effect of abnormal operating earnings on goodwill increases with operating cash receipts persistence, and (2) the effect of operating assets on goodwill increases with the difference between cash receipts persistence and the depreciation parameter. Generally, the estimated coefficients from the FO model correspond to their implied theoretical values. However, we reject a paired-sample test of equality of medians between the estimated beginning operating asset weights and those implied by our persistence, depreciation, and cost of capital parameters. We interpret our results as supporting the qualitative features and the underlying intuition of the model.

JEL Classification: M4

Suggested Citation

Ahmed, Anwer S. and Morton, Richard M. and Schaefer, Thomas F., Accounting Conservatism and the Valuation of Accounting Numbers: Evidence on the Feltham-Ohlson (1996) Model. Available at SSRN: https://ssrn.com/abstract=275556 or http://dx.doi.org/10.2139/ssrn.275556

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Richard M. Morton

Florida State University - Department of Accounting ( email )

Room No. 421
Tallahassee, FL 32306-8234
United States
850-644-7877 (Phone)

Thomas F. Schaefer

University of Notre Dame - Department of Accountancy ( email )

Notre Dame, IN 46556-0399
United States
219-631-7324 (Phone)
219-631-5255 (Fax)

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