Academic journal article Academy of Accounting and Financial Studies Journal

Value Relevance of Historical Information and Forecast Information in China: Empirical Evidence Based on the Ohlson and Feltham-Ohlson Models

Academic journal article Academy of Accounting and Financial Studies Journal

Value Relevance of Historical Information and Forecast Information in China: Empirical Evidence Based on the Ohlson and Feltham-Ohlson Models

Article excerpt


The research of firm value and value relevance has been gaining popularity in financial and accounting area for a long time. Value relevance is defined as the ability of information disclosed by financial statements to capture and summarize firm value (Sibel Kargin, 2013, p. 71). Research studies on value relevance aim to find out whether there is statistical significance between accounting information and firm value.

Firm value refers to "the price of the company." It is a representation of the company in terms of the "monetary amount." However, with the development of modern business model diversification and financial securities market, and if we look at the corporate value from various perspectives, the meaning could be different. To derive significant relevance between accounting information and corporate value, and to determine how to evaluate enterprise value, one thing to mention here is the corporate value that has attracted attention in the investment industry, and in case of listed companies, it is stock capitalization.

Until the middle of the 1980s, using return on equity (ROE), earnings per share (EPS), and price book-value ratio (PBR) to calculate the enterprise value was the mainstream in the world of investment industry. In the 1990s, models of corporate valuation, prepared by calculating the cash flow and cost of capital, emerged, replacing the traditional investment style. Economic value added (EVA) and free cash flow (FCF) are typical examples. These models were disseminated through consulting firms and became popular in large companies in the United States. Although these firm valuation models partially used the accounting data, they denied the current accounting data based on the accrual accounting theory with a feature that focuses on cash flow.

On the other hand, accounting information based on enterprise valuation models emerged in the middle of the 1990s to counter the corporate valuation models that are cash flow-based, which attracted considerable attention in the academic world. It is called the Ohlson model or residual income model (RIM). According to the RIM, firm value is equal to the sum of the book value of equity and the present value of future abnormal earnings. This model is successful in expressing the stock price and prediction while assuming that the ideal situation holds for capital market, including the irrelevance of the dividend. Therefore, the enterprise value evaluation model, which is based on the Ohlson model (including the Feltham-Ohlson (FO) model that is applied in this paper), has now become a core model of value relevance research.

In addition, with development in modern accounting, accounting information can be divided by time. There is historical accounting information that refers to published accounting data of the past and forecast accounting information that is artificially predicted by either enterprise managers or analysts about companies' future operations. In China, managers' forecast information is not required to be published for listed companies. Thus, the forecast information we discuss here is simply analysts' forecasts. The value relevance of historical accounting information and forecast accounting information could be different, as it has been discussed in previous research studies for developed capital markets.

With a great speed of economic growth, China has emerged as one of the most important economies in the world in the 21st century. The Chinese stock market has been emerging for over 20 years, though it is still a young capital market that is under development compared with the stock market in developed countries. There is still no widely recognized evaluation model in the domestic market yet. The Ohlson and FO models are popular and widely cited in developed countries. This paper aims at examining the stock price interpretability using the Ohlson and FO models by applying these models to data from the Chinese stock market. …

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