The Feltham‐Ohlson Framework: Implications for Empiricists*

Bernard, Victor L.

doi:10.1111/j.1911-3846.1995.tb00463.x

Cited by 328 publications

(196 citation statements)

References 14 publications

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“…Because Ji;r -7 J; as T -7 oo where (5) intrinsic value of the firm at date t as a f unction of f uture earnings and book values measured over a finite horizon the proxy of intrinsic value approaches the c urrent market price of the firm' s stock, so long as the forecast horizon is just "long enough" (Bernard, 1995). Thus, the usefulness of the selected research procedure ultimately rests on an empirical question.…”

Section: Empirical Implementationmentioning

confidence: 99%

The Impact of Voluntary Corporate Disclosures on the Ex ante Cost of Capital for Swiss Firms

Hail

2001

SSRN Journal

101

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The relationship between disclosure quality and cost of equity capital is an important topic in today's economy. In general, economic theory and anecdotal evidence suggest a negative association. Empirical work on this link, however, is confronted with major methodological drawbacks -neither disclosure level nor cost of capital can be observed directly -and has documented somewhat confounding results so far. Adopting a finite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm's voluntary disclosure policy on its implied cost of capital. Switzerland seems especially suited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a cross-sectional sample of seventy-three nonfinancial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8 to 2.4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias -a major concern in disclosure studies -the marginal effect remains of the same direction and even increases in magnitude, although at lower levels of statistical significance. One reason for the strong relationship might be found in differing institutional factors between the US and Swiss capital markets. Abstract:The relationship between disclosure quality and cost of equity capital is an important topic in today' s economy. In general, economic theory and anecdotal evidence suggest a negative association. Empirical work on this link, however, is confronted with major methodological drawbacks-neither disclosure level nor cost of capital can be observed directlyand has documented somewhat confounding results so far. Adopting a tillite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm' s voluntary disclosure policy on its implied cost of capital. Switzerland seems especially s uited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a crosssectional sample of73 non-financial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8% to 2 .4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias-a major concern in disclosure studies -the marginal effect remains of the same direction and even increases in magnitude although at lower levels of statistical significance. One reason for the strong relationship might ...

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Section: Empirical Implementationmentioning

confidence: 99%

The Impact of Voluntary Corporate Disclosures on the Ex ante Cost of Capital for Swiss Firms

Hail

2001

SSRN Journal

101

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“…Following Bernard [1995], I also adjust coefficient estimates for cross-sectional correlation according to the Newey and West [1987] approach. The goodness of fit of each model is measured as the mean value of all average annual adjusted R²s.…”

Section: Results From In-sample Regressionsmentioning

confidence: 99%

“…For each model, yearly cross-sectional regressions are run for the whole subsample. T-statistics for coefficient estimates are computed using the Fama-MacBetch [1973] approach and are additionally adjusted for cross-sectional correlation as suggested by Bernard [1995]. The table also presents the z-statistics from Vuong [1989] tests of differences in explanatory power across the BM and EQ model.…”

Section: Notesmentioning

confidence: 99%

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Improving Profitability Forecasts with Information on Earnings Quality

Demmer

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractPrior literature documents the usefulness of the DuPont disaggregation for predicting firms' future profitability, operating income, and stock market returns. In addition, research also emphasizes the importance of earnings quality information. However, there is a lack of research examining how earnings quality affects forecasts of profitability. This paper explores whether different earnings quality factors moderate the accuracy of profitability forecasts. This study contributes to the existing literature along three dimensions. First, contrary to financial statement analysis studies, I find that changes in profit margin provide incremental information for predicting changes in future return on assets. After controlling for earnings quality factors, the incremental usefulness of this accounting signal increases significantly. Second, this paper contributes to the earnings quality literature by providing an approach as how to include this information into forecasts of profitability. In doing so, I incorporate the main drivers of earnings quality (i.e. fundamental performance and the accounting system) into profitability forecasts. Last, the paper adds to the literature on how capital market participants perceive accounting information. I document that both analysts and investors appear to efficiently incorporate earnings quality information in their investment decisions. JEL classification: M41

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“…O efeito da combinação dos lucros com o valor do patrimônio líquido na estimação do valor das ações foi estudado empiricamente por Bernard (1995) e teoricamente por Ohlson (1995). O modelo proposto por Ohlson (1995) relaciona o preço de uma ação à combinação de seu valor patrimonial, lucro e dividendos, gerando uma função linear aditiva de valor patrimonial e lucros anormais.…”

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Avaliação empírica do modelo de Burgstahler e Dichev no mercado brasileiro

2007

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RESUMOEstudos recentes indicam que lucros e valor patrimonial são importantes fatores explicativos do valor de mercado das ações de empresas. Esta realização se fundamenta no trabalho de Burgstahler e Dichev (1997) que, a partir de um modelo de avaliação estruturado com base nos modelos de precificação de opções, concluiu que o valor de uma ação é uma função convexa do lucro, quando o valor patrimonial é mantido constante e, simultaneamente, o valor de uma ação é função convexa do valor patrimonial, quando o lucro é mantido constante. Empregando metodologia adaptada daquela utilizada no trabalho de Burgstahler e Dichev (1997) e utilizando uma amostra composta por ações representativas do mercado brasileiro, os testes realizados por meio da comparação de duas carteiras de ações, uma com alta e outra com baixa razão preço/valor patrimonial, geraram resultados que corroboram a relação supramencionada.Palavras-chave: avaliação de empresas; precificação de opções; valor residual. ABSTRACTRecent studies indicate that earnings and book values are important factors in explaining stock prices. This paper uses the work of Burgstahler and Dichev (1997), which used a model based on option pricing theory and concluded that stock prices are convex functions of profits when book values are kept constant and stock prices are a convex function of book values when earnings are constant. Using an adapted methodology and applying on a sample of stocks traded on the Brazilian market, the tests realized through a comparison of two portfolios with high and low price-to-book ratio supported the hypothesis, as expected.

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The Feltham‐Ohlson Framework: Implications for Empiricists*

Cited by 328 publications

References 14 publications

The Impact of Voluntary Corporate Disclosures on the Ex ante Cost of Capital for Swiss Firms

The Impact of Voluntary Corporate Disclosures on the Ex ante Cost of Capital for Swiss Firms

Improving Profitability Forecasts with Information on Earnings Quality

Avaliação empírica do modelo de Burgstahler e Dichev no mercado brasileiro

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