Conservative Accounting and Linear Information Valuation Models

43 Pages Posted: 13 Nov 2005

See all articles by Young-Soo Choi

Young-Soo Choi

Sungkyunkwan University

John O'Hanlon

Lancaster University Management School

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Abstract

Prior research using the residual income valuation model and linear information models has generally found that estimates of firm value are negatively biased. We argue that this could result from the way in which accounting conservatism effects are reflected in such models. We build on the conservative accounting model of Feltham and Ohlson (1995) and the Dechow, Hutton and Sloan (1999) (DHS) methodology to propose a valuation model that includes a conservatism-correction term, based on the properties of past realizations of residual income and other information. Other information is measured using analyst-forecast-based predictions of residual income. We use data comparable to the DHS sample to compare the bias and inaccuracy of value estimates from our model and from models similar to those used by DHS and Myers (1999). Valuation biases are substantially less negative for our model, but valuation inaccuracy is not markedly reduced.

Keywords: Accounting, Capital markets, Valuation models, Linear information models

JEL Classification: G12, G29, M41, M44

Suggested Citation

Choi, Young-Soo and O'Hanlon, John F. and Pope, Peter F., Conservative Accounting and Linear Information Valuation Models. Contemporary Accounting Research, Vol. 23, No. 1, Spring 2006, Available at SSRN: https://ssrn.com/abstract=844166

Young-Soo Choi

Sungkyunkwan University ( email )

School of Business
53 Myeongnyun-dong 3-ga, Jongno-gu
Seoul, 110-745
Korea
+8227600423 (Phone)
+8227600440 (Fax)

John F. O'Hanlon (Contact Author)

Lancaster University Management School ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Peter F. Pope

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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