Accounting-Based Valuation with Changing Interest Rates
- 257 Downloads
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.
Keywordsstochastic interest rates valuation Ohlson model random walk model of earnings permanent earnings earnings response coefficient
Unable to display preview. Download preview PDF.
- Barth, M., Beaver, W., Landsman, W. 1998“Relative Valuation Roles of Equity Book Value and Net Income as a Function of Financial Health”Journal of Accounting and Economics25134Google Scholar
- Beaver, W. 1999“Comments on An Empirical Assessment of the Residual Income Valuation Model”Journal of Accounting and Economics263542Google Scholar
- Feltham, G., Ohlson, J. 1999“Residual Earnings Valuation with Risk and Stochastic Interest Rates”The Accounting Review74165183April 1999Google Scholar
- Huang, C. and R. Litzenberger. (1988). Foundations of Financial Economics, North Holland.Google Scholar
- Nissim, D. and S. Penman, (2000). “The Empirical Relationship Between Interest Rates and Accounting Rates of Return”. Working Paper, Columbia University.Google Scholar
- Ohlson, J. 1995“Earnings, Book Values, and Dividends in Equity Valuation”Contemporary Accounting Research11661687(Spring 1995)Google Scholar
- Ohlson, J., Zhang, X. 1998“Accrual Accounting and Equity Valuation”Journal of Accounting Research3685111Supplement 1998Google Scholar
- Ohlson, J. A. 2001“Earnings, Book Values, and Dividends in Equity Valuation: An Empirical Perspective”Contemporary Accounting Research18107120Spring 2001Google Scholar
- Ryan, S. (1988). “Structural Models of the Accounting Process and Earnings”. Ph.D. Dissertation, Stanford University.Google Scholar
- Yee, K. (2001). “Aggregation, Dividend Irrelevancy, and Earnings-Value Relations”. Forthcoming in Contemporary Accounting Research in 2005.Google Scholar
- Zhang, X. (2000). “Conservative Accounting and Equity Valuation.” Journal of Accounting and Economics. (February 2000): 125--149.Google Scholar