Abstract
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. © 2004 Kluwer Academic Publishers.
| Original language | English |
|---|---|
| Pages (from-to) | 419-441 |
| Journal | Review of Accounting Studies |
| Volume | 9 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - Dec 2004 |
| Externally published | Yes |
Bibliographical note
Publication details (e.g. title, author(s), publication statuses and dates) are captured on an “AS IS” and “AS AVAILABLE” basis at the time of record harvesting from the data source. Suggestions for further amendments or supplementary information can be sent to [email protected].Research Keywords
- Earnings response coefficient
- Ohlson model
- Permanent earnings
- Random walk model of earnings
- Stochastic interest rates
- Valuation