Empirical Tests of the Feltham-Ohlson (1995) Model
Posted: 13 Jan 2005
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
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