Conservative Accounting and Linear Information Valuation Models*

Prior research using the residual income valuation model and linear information models has generally found that estimates of firm value are negatively biased. We argue that this could result from the way in which accounting conservatism effects are reflected in such models. We build on the conservative accounting model of Feltham and Ohlson 1995 and the Dechow, Hutton, and Sloan 1999 (DHS) methodology to propose a valuation model that includes a conservatism‐correction term, based on the properties of past realizations of residual income and “other information”. “Other information” is measured using analyst‐forecast‐based predictions of residual income. We use data comparable to the DHS sample to compare the bias and inaccuracy of value estimates from our model and from models similar to those used by DHS and Myers 1999. Valuation biases are substantially less negative for our model, but valuation inaccuracy is not markedly reduced.     

The Relation between Market Values,Earnings Forecasts,and Reported Earnings*

Recently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one‐ and two‐period‐ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one‐ and two‐period‐ahead residual income, current capital investment, and start‐of‐period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one‐period‐ahead residual income forecast and a positive coefficient on the two‐period‐ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.     

Equity Valuation Employing the Ideal versus Ad Hoc Terminal Value Expressions*

Recently, Penman and Sougiannis (1998) and Francis, Olsson, and Oswald (2000) compared the bias and accuracy of the discounted cash flow model (DCF) and Edwards‐Bell‐Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non‐price‐based terminal values, RIM outperforms DCF. Our first research objective is to explore the question whether, over a five‐year valuation horizon, DCF and RIM are empirically equivalent when Penman's (1997) theoretically “ideal” terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these valuation models. Thus, the apparent superiority of RIM does not hold in a level playing field comparison. Our second research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression generates the lowest prediction errors, compared with models that employ non‐price‐based terminal values under arbitrary growth assumptions. The results indicate that, for both DCF and RIM, price‐based valuation models outperform the corresponding non‐price‐based models by a wide margin. These results imply that researchers should exercise care in interpreting findings from models using ad hoc terminal value expressions.     

A Note on a Framework for Valuation Ratios Based on Fundamentals*

Valuation ratios divide stock price by accounting metrics such as earnings, earnings growth, and book value. This study adapts the general valuation framework in Ohlson and Juettner-Nauroth (2005) and Ohlson (2005) to present a unified approach for developing valuation ratios based on fundamentals, referred to as fundamental valuation ratios. One starts with a valuation model that is driven by an accounting metric a and its abnormal growth, then divides the valuation model by a to get a fundamental valuation ratio. For any valuation ratio, one can find a corresponding fundamental valuation ratio, as long as the valuation model is based on the same metric a as the valuation ratio denominator.     

基丁剩余收益估值模型的市场错误定价研究

基于Ohlson（1995）创立的包含线性信息动态过程的剩余收益估值模型,对1995—2006年部分A股上市公司的内在价值进行测算,据此分析中国证券市场中的错误定价问题。结果发现,剩余收益、净资产账面价值均具有较强的持续性和可预测性。大多数公司年份的股价被高估,表明市场错误定价问题在我国证券市场中常年存在。具体说来,在1997、2000、2001和2007年4月,样本公司股价处于系统性高估状态;相反,多数公司股价在2005和2006年4月被低估。文章的创新之处在于利用可观测的会计信息直接检验线性信息动态过程,避免采用跨期盈余预测值进行估值,一定程度上提高了研究结果的可靠性。     

剩余收益估值模型研究综述

剩余收益估值模型将会计数据合理地融入企业价值的评估中,对于会计领域理论与实证的结合研究具有重要的价值意义.从剩余收益估值模型的概念基础、模型构建、实证检验及拓展改进角度进行论述,回顾了国内外学者关于剩余收益估值模型的期刊论文和著作,试图在已有研究结论和成果的基础上,考虑模型中存在的不足,为进一步研究提出思路.     

Earnings,Book Values,and Dividends in Equity Valuation: An Empirical Perspective*

This paper revisits Ohlson 1995 to make a number of points not generally appreciated in the literature. First, the residual income valuation (RIV) model does not serve as a crucial centerpiece in the analysis. Instead, RIV plays the role of condensing and streamlining the analysis, but without any effect on the substantive empirical conclusions. Second, the concept of “other information” in the model can be given concrete empirical content if one presumes that next‐period expected earnings are observable.     

Aggregation,Dividend Irrelevancy,and Earnings‐Value Relations*

In this paper I show that the aggregation of operating and financial income imposes three conditions on earnings‐based value functions. These three conditions provide a shortcut way to identify dividend irrelevant value functions. For example, consider any value function V_t of book value b_t, earnings x_t, and dividends d_t. The aggregation conditions imply that V_t must be of the form V_t = (1 ? k)bt + k [f xt ? dt]. f is the permanent earnings capitalization factor and undetermined weight k may be any function of Δ_t ≡[φx_t ? d_t] ? b_t. The Ohlson 1995 model is the special case when k is constant. But generally k does not have to be constant to maintain dividend irrelevancy. Whenk varies with Δ_t, V_t is nonlinear in earnings. Hence, this result specifies how V_t may be nonlinear in earnings in settings with limited liability or production or abandonment options and still be dividend‐irrelevant. An even more remarkable feature of this result is that it holds whether accounting is clean surplus or not. One must conclude that accounting‐based valuation properly builds from accounting aggregation and Δ_t, and not from the clean surplus relation and abnormal earnings as many now believe.     

Interest Rate Pass‐through in Malawi: Implications for the Effectiveness of Monetary Policy

This study investigates the interest rate pass‐through in Malawi and its implications on monetary policy effectiveness. Using the cost‐of‐funds approach and monthly data from 2009 to 2015, an autoregressive distributed lag model is fitted. Results show that there is a near complete pass‐through to the lending rate but not the savings rate. The magnitude of the pass‐through is relatively higher under smaller banks. The results suggest that the structure of the banking industry matters. Market power is important in understanding the variation in lending and savings rates across banks. Overall, short‐term rates as operating targets are consistent with inflation targeting in Malawi.     

On Comparing Cash Flow and Accrual Accounting Models for Use in Equity Valuation: A Response to Lundholm and O'Keefe (CAR,Summer 2001)*

A claim is commonly made that cash flow and accrual accounting methods for valuing equities must always yield equivalent valuations. A recent paper by Lundholm and O'Keefe 2001, for example, claims that, because of this equivalence, there is nothing to be learned from empirical comparison of valuation models. So they dismiss recent research that has shown that accrual accounting residual income models and earnings capitalization models perform, over a range of conditions, better than cash flow or dividend discount models. This paper demonstrates, with examples, that the claim is misguided. Practice inevitably involves forecasting over finite, truncated horizons, and the accounting specified in a model — cash versus accrual accounting in particular — is pertinent to valuation with finite‐horizon forecasting. Indeed, the issue of choosing a valuation model is an issue of specifying pro forma accounting, and so, for finite‐horizon forecasts, one cannot be indifferent to the accounting.     

创业板上市公司会计信息、剩余收益与股价相关性研究

上市公司重要财务指标的会计信息与股票价值相关性的研究一直是理论界长期关注的热点。该文以创业板上市公司为样本,结合Ohlson剩余收益理论,考察了2011-2013年该板块上市公司披露的会计信息对股票价格的影响。结果发现：创业板上市公司的会计信息能够在一定程度上很好地解释股票价格的波动,但创业板尚处于发展阶段,并未形成弱势有效市场;投资者在投资决策时会受到已掌握的会计信息的影响,剩余收益指标可以引导投资者更加重视企业的内在价值,进行投资决策时更多地考虑企业是否创造了价值,从而为价值投资者提供更好的依据。     

Explaining Interest Rate Spreads in Ghana*

Abstract: The question of the optimal spread between bank lending rates and rates that banks pay on deposits, which is fair to bankers, depositors and borrowers, has dogged economies for some time. In Ghana, there is widespread perception that the spread is too wide. Bankers, on the other hand justify the spread on the basis of economic variables that affect them. This paper contributes to the literature by identifying, in the case of Ghana, the short‐run response of the net interest margin of banks to changes in bank‐specific, industry‐specific and macroeconomic variables within the broad framework of Ho and Saunders (1981) . We find that increases in the following factors significantly increase net interest margin — bank market power (or concentration), bank size, staff costs, administrative costs, extent of bank risk aversion and the rate of inflation. On the other hand, increases in the following variables decrease net interest margin significantly — bank excess cash reserves, the central bank lending rate, management efficiency and the passage of time. To help reduce interest rate margins, we recommend that banks should not get too big, the central bank should consider lowering the capital adequacy ratio and banks should be required to pass on to borrowers the full extent of reductions or increases in the central bank lending rate. Continued efforts at keeping inflation at bay will also help.     

Investor behaviour in a nascent capital market: Scottish bank shareholders in the nineteenth century

This article uses the records of nineteenth‐century Scottish banks in an attempt to understand investor behaviour in the early British capital market. It presents four main findings, some of which do not conform to the basic assumptions of standard asset pricing theories. First, in an era when efficient portfolio diversification was not possible, the intrinsic risk of an equity security was an important input into investor decision‐making. Second, our evidence suggests that businesspeople initially regarded bank stock as a consumption good, as being a stockholder gave them privileged access to bank finance. When bank lending practices changed in the middle of the century, this access‐to‐credit advantage associated with owning bank stock largely disappeared. Third, investors typically exhibited a bias towards banks that conducted business in the areas where they resided. Fourth, a sizeable proportion of investors were stockholders in more than one bank.     

Bank Lending and Economic Growth of Chinese Cities

Using a city-level dataset over the period 2004-2006,the present study investigates the relationship between bank lending and the economic growth of Chinese cities.Unlike past studies,we divide bank lending into loans from three types of banks:foreign banks,city banks and other banks.Our findings are threefold.First,the lending of foreign banks exhibits a strong and positive association with the economic growth of Chinese cities. Second,foreign direct investment in the sampled cities enhances the lending effects of foreign banks,but reduces the lending effects of other banks on the economy of Chinese cities.Third, the effects of city competitiveness are similar to those of foreign direct investment;that is,city competitiveness augments the lending effects of foreign banks but reduces the lending effects of other banks.     

Valuation and Clean Surplus Accounting: Some Implications of the Feltham and Ohlson Model for the Relative Information Content of Earnings and Cash Flows*

Abstract. This paper provides an analysis of the implications of the Feltham and Ohlson (1995) model for the relationship between unexpected security returns and unexpected earnings and cash flows. A simplified version of the Feltham and Ohlson linear information model is utilized to provide an intuitive explanation of the coefficients in the unexpected returns equation and to show that incremental information content for unexpected free cash flow beyond accounting earnings in the model depends on the existence of positive net present value (NPV) investment opportunities. The paper concludes by arguing that the model provides useful insights into factors that may influence the empirical relationship between security returns and accounting data. Résumé. L'auteur expose les résultats d'une analyse des répercussions du modèle de Feltham et Ohlson (1995) sur la relation entre les rendements imprévus des titres, d'une part, et les bénéfices et les flux monétaires imprévus, d'autre part. Il a recours à une version simplifiée du modèle d'information linéaire de Feltham et Ohlson pour expliquer intuitivement les coefficients de l'équation des rendements imprévus et pour montrer que, dans le modèle, le contenu marginal en information supérieur des flux monétaires disponibles imprévus par rapport aux bénéfices comptables dépend des possibilités d'investissement existantes offrant une valeur actualisée nette (VAN) positive. L'auteur conclut en affirmant que le modèle livre des renseignements utiles quant aux facteurs susceptibles d'influencer la relation empirique entre les rendements des titres et les données comptables.     

基于向量AR(p)过程下的广义剩余收益估值研究

本文拓展出了基于P阶向量自回归过程的广义剩余收益估值模型;而且根据该拓展模型推导了盈余反应系数指标的理论公式;并以实例演示了：直接应用上述研究结论,著名的Feltham and Ohlson（1995）估值模型能很简单地推广到AR（2）过程版本,使该估值模型能利用更丰富的历史信息。     

Bank financial structure in pre-crisis East and Southeast Asia

Seeking evidence on the role of bank governance in the 1997 crisis, we study financial structure and bank performance from 1987 to 1997. Financial performance ratios (capital adequacy, liquidity, profitability, and loan preference) are regressed on structural variables (bank assets, net income, administrative expenses, and time), focusing on banks’ management efficiency and financial performance. During financial liberalization, loan-preference ratios were higher, perhaps signaling more risk; so were capital-adequacy ratios. Capital adequacy falls, then rises as management size increases; profitability behaves oppositely, indicating diminishing returns. Thailand’s, Korea’s and Indonesia’s banks show stronger lending preference but weaker profitability; possible harbingers of crisis.     

Accounting Choices and Risk Management: SFAS No. 115 and U.S. Bank Holding Companies*

This paper provides evidence that regulatory contracts affect firms' accounting choices and risk‐management decisions. Specifically, we investigate whether an exogenous shock to regulatory risk induced by Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 1993), encouraged U.S. banks to deviate from portfolio and risk benchmarks when they adopted the standard. Because we cannot observe relevant benchmarks, we model portfolio and risk decisions as functions of macroeconomic and firm‐specific factors using data from a period when regulatory capital was immune to SFAS No. 115 accounting. We examine a sample of 230 publicly traded banks and find that (1) irrespective of adoption timing, banks classified too few securities available for sale (AFS) relative to estimated benchmarks; (2) weaker banks that adopted the standard early classified far more securities as AFS relative to benchmarks; (3) banks altered the size of their securities portfolios along with the levels of interest‐rate risk and credit risk as regulatory capital decreased; and (4) the level of interest‐rate risk on banks' loan portfolios increased at the time of SFAS No. 115 adoption. We also explore the 1995 Financial Accounting Standards Board (FASB) amnesty when firms could “readopt” SFAS No. 115. We find that banks used the 1995 FASB amnesty to undo strategic initial SFAS No. 115 adoption decisions. Taken together, our findings suggest that SFAS No. 115 caused some of the accounting and economic consequences predicted by bankers, analysts, and academics.     

Indonesia's New Banking Law

An accumulation of old banking laws was replaced with a single new one early in 1992. The previous focus on the lending side of banks' activities has been replaced by greater emphasis on their deposit mobilisation and intermediation functions. Distinctions between commercial, savings and development banks have been dropped—the only functional distinction remaining being that between banks which offer cheque account services and the much smaller ones which do not. Important changes relating to ownership include placing the state banks on the same legal footing as those from the private sector, allowing them to sell their shares to the public, and permitting foreigners to purchase shares in domestic banks listed on the stock exchange. Those who breach the new law are liable to heavy fines and gaol terms. The law allows the government to require all (not just state) banks to undertake special developmental or equity-oriented programs.     

Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century1

In this article we develop new tools to survey the development of lending‐of‐last‐resort operations in the mid‐nineteenth century. One finding is that free lending and extensive liquidity support against good collateral developed gradually after 1847, and was already a fact of life before Bagehot published Lombard Street. Another is that the extension of the Bank of England's lender‐of‐last‐resort function went along with a reduction of its exposure to default risks, in contrast with accounts that have associated lending of last resort with moral hazard. Finally, we provide a new interpretation of the ‘high rates’ advocated by Bagehot. We suggest they were meant to prevent banks from free‐riding on the safety offered by the central bank, and were aimed at forcing them to keep lending during crises so as to maintain a critical degree of liquidity in the money market.