Academic journal article Accounting & Taxation

A Test of the Ohlson Model on the Italian Stock Exchange

Academic journal article Accounting & Taxation

A Test of the Ohlson Model on the Italian Stock Exchange

Article excerpt

ABSTRACT

This article belongs to the current in research literature, which is concerned with value relevance. Its main aim is to test the impact of the current and future accounting variables on the firm's market value, by analyzing these relations with reference to the financial sector of the Italian Stock Exchange. To pursue this objective we carried out a multiple linear regression analysis, within a model inspired by the Ohlson model (1995). The model employed verified the research hypotheses for following (subsequent) stages by testing at first the impact of the current accounting variables, then of the future ones on the firm's market value. The results of the analysis show that the relation between the accounting variables (current and future) and the market price, after controlling for market risk, is fully proved on the Italian market, meaning that investors price accounting data in their firm's evaluation process. The article contributes to expand the number of empirical research studies on the value relevance of accounting variables, by analyzing this theme on a Stock Exchange market not yet explored from this perspective. The main originality of the article consists in its being one of the first research studies to test the validity of the Ohlson model (1995) in its original version on the Italian market.

JEL: G14, G21, G22, M41

KEYWORDS: Value relevance, Ohlson model, analysts' forecasts, financial sector.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The present work belongs to the strand of literature known as Value Relevance Analysis (VRA), which, since 1995, has seen significant development and whose objective is that of estimating the relevance of an accounting value in the determination of market value. (Courteau, 2008). The theoretical basis on which the study is founded is represented by the Ohlson model (1995) - the main point of reference in market based accounting research (Giner and Iniguez, 2006 b) - the success of which amongst accounting scholars is due to its development of a rigorous theory for firm evaluation in terms of accounting. In this model, market evaluation is a function both of the fundamental accounting variables, and the "other information" variable (v), which contains all the information affecting future firm profitability and thus market forecasts. Although the model undergone to several empirical tests, particularly in the United States, much has yet to be learned on the market value/accounting values ratio in other geographical contexts, as well in as environments characterized by different forms of accounting regulation (Courteau, 2008). For the above reasons, we have chosen to test the validity of the model on a national market, which presents different characteristics both in terms of size (number of quoted firms), and orientation- towards the market or towards banks (Brealey et al, 2007).

The present work has two aims: 1) To test the influence of the accounting variables earnings and book value on the firm's market value. 2) To test the influence of future profitability (approximated by financial analysts' forecasts on future earnings) on the market value of the firm. To verify the research hypotheses we conduct a regression analysis with a model inspired by the original version of the Ohlson model (1995). The research model tested the hypotheses in stages: first by testing the impact of the accounting variables on market value, and later the impact of financial analysts' forecasts on market value. The findings confirm the existence of a positive relationship between accounting values and market values.

The analysis focused on a particular area of the Italian capital market, the financial sector. The particular characteristics of this sector compared with others tend to induce market researchers to exclude it from their analysis. In the present study, by contrast, we focused our attention precisely on this sector in an attempt to establish whether the Ohlson model holds validity in this context. …

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