Empirical Tests of the Feltham–Ohlson (1995) Model

Jeffrey L. Callen () and Dan Segal ()
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Jeffrey L. Callen: University of Toronto
Dan Segal: University of Toronto

Review of Accounting Studies, 2005, vol. 10, issue 4, No 2, 409-429

Abstract: Abstract This paper tests the Feltham–Ohlson (1995) model by transforming the undefined “other information” variables into expectational variables, as suggested by Liu and Ohlson [Liu and Ohlson (2000). Journal of Accounting, Auditing and Finance 15, 321–331]. The signs of the estimated coefficients conform to the model’s predictions using panel data techniques, non-parametric estimation, reverse regressions and portfolio regressions. The tests reject the Ohlson model in favor of Feltham–Ohlson. Nevertheless, the estimated leverage coefficient takes a value of three instead of one for most variations of the model. Also, the 1-year-ahead price predictions of the Feltham–Ohlson model are no more accurate than those of the Ohlson model or a naive earnings valuation model.

Keywords: Feltham–Ohlson; equity valuation; conservatism; net operating assets; growth (search for similar items in EconPapers)
JEL-codes: G12 M41 (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11142-005-4208-3

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