posted on 2014-09-24, 10:58authored byAli Ataullah, Huw Rhys, Mark Tippett
We incorporate a real option component into the Ohlson (1995) equity valuation model and then use this augmented model to make assessments about the form and nature of the systematic biases that are likely to arise when empirical work is based on linear models of the relationship between the market value of equity and its determining variables. We also demonstrate how one can expand equity valuation models in terms of an infinite series of ‘orthogonal’ polynomials and thereby determine the relative contribution which the linear and non‐linear components of the relationship between equity value and its determining variables make to overall equity value. This procedure shows that non‐linearities in equity valuation can be large and significant, particularly for firms with low earnings‐to‐book ratios or where the undeflated book value of equity is comparatively small. Moreover, it is highly unlikely the simple linear models that characterise this area of accounting research can form the basis of meaningful statistical tests of the relationship between equity value and its determining variables.
History
School
Business and Economics
Department
Business
Published in
ACCOUNTING AND BUSINESS RESEARCH
Volume
39
Issue
1
Pages
57 - 73 (17)
Citation
ATAULLAH, A., RHYS, H. and TIPPETT, M.J., 2009. Non-linear equity valuation. Accounting and Business Research, 39 (1), pp.57-73.
This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/