Empirical Tests of the Feltham-Ohlson (1995) Model

Posted: 13 Jan 2005

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Abstract

This paper tests the Feltham-Ohlson (1995) model by transforming the undefined "other information" variables into expectational variables, as suggested by Liu and Ohlson (2000). The signs of the estimated coefficients conform to the model's predictions using panel data techniques, non-parametric estimation, reverse regressions and portfolio regressions. The tests reject the Ohlson model in favor of Feltham-Ohlson. Nevertheless, the estimated leverage coefficient takes a value of three instead of one for most variations of the model. Also, the one-year-ahead price predictions of the Feltham-Ohlson model are no more accurate than those of the Ohlson model or a naive earnings valuation model.

Keywords: Feltham-Ohlson, Equity Valuation, Conservatism, Net Operating Assets, Growth

JEL Classification: M41, G12

Suggested Citation

Callen, Jeffrey L. and Segal, Dan, Empirical Tests of the Feltham-Ohlson (1995) Model. Available at SSRN: https://ssrn.com/abstract=648125

Jeffrey L. Callen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Dan Segal (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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