In Price and returns studies applying Ohlsons (1995) model, there has been arguments that price looks at a point in time while returns look at changes within a time period thus captures the timeliness of accounting information. So some scholars think it is no good to use price yet extant literature is full of price studies as much as return studies. Can someone point to me why it is ok to use price and under what circumstances should it be used. Any references will do.
Regards
The variable you can use will depend on your statement of problem. I believe there are sacrosanct rules. Your statement of problem and objective should guide your choice of variable: either price or returns
Thanks John and my issue is that Price (share price) cannot be regressed on any variables. In Ohlsons model,share price after 3 months is regressed on book value per share, net income per share and another variable Vt. Some scholars argue that it is wrong. One author has indicated that predictive content of price signals decline even more. This finding is consistent with the insights of the noisy rational expectations equilibrium framework analysis, i.e. that increased noise has caused the predictive content of prices to degrade over time. this suggests that stock prices may not be an appropriate benchmark for gauging the information content of accounting earnings. My question is what can one do when price is not the one to apply in value relevance studies?
Dear Erick Outa. Could you please attach here the articles that argue the work done by Ohlson (1995) so that we can read and evaluate the arguments.
Thanks. The above arguments are contained in several papers:
1.Dontoh, A., Radhakrishnan, S. & Ronen, J. (2007). “Is stock price a good measure for assessing value-relevance of earnings? An empirical test, Review of Managerial Science, Vol 1:1 3-45.
2.Ohlson, J. (1995). “Earnings, books value, and dividends in equity valuation”. Contemporary Accounting research, 11: 661-688.
3.Silvestri, A. & Veltri, S. (2012). “A Test of the Ohlson Model on the Italian Stock Exchange”. Accounting & Taxation, Volume 4, Number 1: 83.
4.Barth, M., Beaver, W., & Landsman, W. (2001). “The relevance of the value relevance Literature for financial accounting standard setting: another view”. Journal of Accounting and Economics 31: 77-104.
5.Kothari, S. & Zimmerman, J. (1995). “Price and Return Models”. Journal of Accounting and Economics 20: 155-192.
etc
Regards
Regards
Erick Outa
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