Accounting-Based Valuation and Changing Interest Rates

35 Pages Posted: 10 Jul 2002

See all articles by Dhananjay (Dan) K. Gode

Dhananjay (Dan) K. Gode

New York University (NYU) - Department of Accounting

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: April 26, 2002

Abstract

We generalize Ohlson's (1995) model to stochastic interest rates while making no specific assumptions about the stochastic process of interest rates. Our analysis of the case when earnings suffice for valuation yields three insights. (1) In the valuation function, the multiplier for forthcoming earnings depends on the current rate, but the multiplier for current earnings depends on the lagged rate. (2) In the residual earnings dynamic, the persistence of residual earnings increases in the current rate and decreases in the lagged rate. (3) In the earnings dynamic, the traditional random walk requires an additional term, current earnings multiplied by the percentage change in interest rates.

Keywords: stochastic interest rates, valuation, Ohlson Model, random walk model of earnings, permanent earnings

JEL Classification: M41, G12

Suggested Citation

Gode, Dhananjay (Dan) K. and Ohlson, James A., Accounting-Based Valuation and Changing Interest Rates (April 26, 2002). Available at SSRN: https://ssrn.com/abstract=309752 or http://dx.doi.org/10.2139/ssrn.309752

Dhananjay (Dan) K. Gode (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States
212-998-0021 (Phone)
212-995-4004 (Fax)

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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