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

Olga Fullana, Mariano Gonzalez Sanchez and David Toscano
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Olga Fullana: Departament de Comptabilitat, Facultat d’Economía, Universitat de València, Av. Tarongers s/n, 46022 Valencia, Spain
David Toscano: Departamento de Economía Financiera y Contabilidad, Facultad de Ciencias Empresariales, Universidad de Huelva, Plaza de la Merced 11, 21002 Huelva, Spain

Mathematics, 2021, vol. 9, issue 5, 1-11

Abstract: 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.

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) (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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