Review of Accounting Studies

, Volume 9, Issue 4, pp 419–441 | Cite as

Accounting-Based Valuation with Changing Interest Rates

  • Dan Gode
  • James Ohlson


This paper generalizes Ohlson’s [Contemporary Accounting Research Vol. 11 No. 2. 661–687 (1995)] equity valuation framework to allow for stochastic interest rates. Much of this analysis initially deals with the specialized setting in which earnings suffice for cum-dividend value. In such a case, the beginning-of-period (lagged) rate determines the capitalization factor, not the current rate. The underlying earnings dynamic modifies the traditional random walk model via an additional term, namely current earnings multiplied by the percentage change in interest rates. The general model retains these basic aspects of the earnings-sufficiency setting. Empirical implications bear on the returns-to-earnings regression: The earnings-response coefficient decreases as the beginning-of-period rate increases.


stochastic interest rates valuation Ohlson model random walk model of earnings permanent earnings earnings response coefficient 


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Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  1. 1.Stern School of BusinessNew York UniversityNew YorkUSA
  2. 2.W.P. Carey School of BusinessArizona State UniversityTempeUSA

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