Accounting based valuation: a simultaneous equations model for forecasting earnings to proxy for ‘other information’

Iris Bergmann and Wolfgang Schultze ()
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Iris Bergmann: University of Augsburg
Wolfgang Schultze: University of Augsburg

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 4, No 4, 1057-1091

Abstract: Abstract This paper develops and tests a simultaneous equations model (SEM) for extending accounting based valuation models used in empirical studies. Rather than using analysts’ forecasts, we derive forecasts of operating income from the SEM to calculate the ‘other information’ variable in the Ohlson (Contemp Account Res 11:661–687, 1995) model. The SEM forecasts are based on observable data contained in the firms’ reporting, like order backlog, and other publicly available information. The SEM produces more accurate out-of-sample forecasts of operating income compared to simple benchmark models particularly in years around economic changes and instability, like the years 2001 and 2009. Integrating the SEM forecast as ‘other information’ in market value regressions significantly increases the explanatory power compared to simpler versions without or with single information proxies for ‘other information’. Finally, we find that the SEM forecast is able to explain a major portion of the information advantage of analysts relevant for explaining market values.

Keywords: Accounting based valuation; Analysts’ earnings forecasts; Ohlson model; Simultaneous equations (search for similar items in EconPapers)
JEL-codes: C53 M40 M41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-017-0654-9

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