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Open AccessArticle

The Role of Assumptions in Ohlson Model Performance: Lessons for Improving Equity-Value Modeling

1
Departament de Comptabilitat, Facultat d’Economía, Universitat de València, Av. Tarongers s/n, 46022 Valencia, Spain
2
Departamento de Economía de la Empresa y Contabilidad, Facultad de Ciencias Económicas y Empresariales, Universidad Nacional de Educación a Distancia (UNED), Paseo Senda del Rey, 11, 28040 Madrid, Spain
3
Departamento de Economía Financiera y Contabilidad, Facultad de Ciencias Empresariales, Universidad de Huelva, Plaza de la Merced 11, 21002 Huelva, Spain
*
Author to whom correspondence should be addressed.
Academic Editor: Christos Floros
Mathematics 2021, 9(5), 513; https://doi.org/10.3390/math9050513
Received: 18 January 2021 / Revised: 9 February 2021 / Accepted: 22 February 2021 / Published: 2 March 2021
(This article belongs to the Special Issue Financial Modeling)
In this paper, we test whether the short-run econometric conditions for the basic assumptions of the Ohlson valuation model hold, and then we relate these results with the fulfillment of the short-run econometric conditions for this model to be effective. Better future modeling motivated us to analyze to what extent the assumptions involved in this seminal model are not good enough approximations to solve the firm valuation problem, causing poor model performance. The model is based on the well-known dividend discount model and the residual income valuation model, and it adds a linear information model, which is a time series model by nature. Therefore, we adopt the time series approach. In the presence of non-stationary variables, we focus our research on US-listed firms for which more than forty years of data with the required cointegration properties to use error correction models are available. The results show that the clean surplus relation assumption has no impact on model performance, while the unbiased accounting property assumption has an important effect on it. The results also emphasize the uselessness of forcing valuation models to match the value displacement property of dividends. View Full-Text
Keywords: clean surplus relation; conservatism correction; displacement property; discount dividends model (DDM); error correction model (ECM); Ohlson valuation model; information dynamics model (LIM); residual income valuation model (RIM) clean surplus relation; conservatism correction; displacement property; discount dividends model (DDM); error correction model (ECM); Ohlson valuation model; information dynamics model (LIM); residual income valuation model (RIM)
MDPI and ACS Style

Fullana, O.; González, M.; Toscano, D. The Role of Assumptions in Ohlson Model Performance: Lessons for Improving Equity-Value Modeling. Mathematics 2021, 9, 513. https://doi.org/10.3390/math9050513

AMA Style

Fullana O, González M, Toscano D. The Role of Assumptions in Ohlson Model Performance: Lessons for Improving Equity-Value Modeling. Mathematics. 2021; 9(5):513. https://doi.org/10.3390/math9050513

Chicago/Turabian Style

Fullana, Olga; González, Mariano; Toscano, David. 2021. "The Role of Assumptions in Ohlson Model Performance: Lessons for Improving Equity-Value Modeling" Mathematics 9, no. 5: 513. https://doi.org/10.3390/math9050513

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