A UK test of an inflation-adjusted Ohlson model

Alan Gregory, Walid Saleh, Jon Tucker

Research output: Contribution to journalReview article

17 Citations (Scopus)
46 Downloads (Pure)

Abstract

This paper conducts a UK test of a version of the Ohlson (1995) model. We should only expect abnormal earnings to revert to zero if the book value of assets is economically meaningful. In this paper we make use of the property revaluations common in UK accounts, but estimate other asset values and earnings in inflation-adjusted terms. This, we argue, gives rise to estimates of abnormal earnings that can reasonably be expected to revert to zero. We then test this modified model on UK data using the Dechow, Hutton and Sloan (1999) method. In line with the predictions of the Ohlson model, we find that these modified abnormal earnings appear to mean revert, and that a first order autoregressive process is sufficient to capture the persistence of UK real abnormal earnings. The modified abnormal earnings model in general predicts one year ahead earnings more successfully than an unmodified model. Furthermore, for much of the sample period, one year ahead predictions of abnormal earnings are better for the real model during periods of higher inflation. The undervaluation problem found in prior studies appears to be replaced with an overvaluation problem in the real model which is more acute during periods of high inflation. Last, we show that an estimate of the model based upon an industry level specification appears to perform no better than a market-wide specification of the model.

Original languageEnglish
Pages (from-to)487-534
Number of pages48
JournalJournal of Business Finance and Accounting
Volume32
Issue number3-4
DOIs
Publication statusPublished - 20 Apr 2005
Externally publishedYes

Fingerprint

Inflation
Ohlson model
Abnormal earnings
Prediction
High inflation
Persistence
Autoregressive process
Asset value
Overvaluation
Assets
Industry
Book value
Undervaluation

Bibliographical note

This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.

Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.

Keywords

  • Inflation
  • Ohlson model
  • UK test

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

Cite this

A UK test of an inflation-adjusted Ohlson model. / Gregory, Alan; Saleh, Walid; Tucker, Jon.

In: Journal of Business Finance and Accounting, Vol. 32, No. 3-4, 20.04.2005, p. 487-534.

Research output: Contribution to journalReview article

Gregory, Alan ; Saleh, Walid ; Tucker, Jon. / A UK test of an inflation-adjusted Ohlson model. In: Journal of Business Finance and Accounting. 2005 ; Vol. 32, No. 3-4. pp. 487-534.
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