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Using forecasting criteria to identify value relevance in the relationship between accounting numbers and market value

Citation

Alexander, DR and Falta, M and Willett, RJ, Using forecasting criteria to identify value relevance in the relationship between accounting numbers and market value, Abacus, 48, (3) pp. 316-347. ISSN 1467-6281 (2012) [Refereed Article]

Copyright Statement

Copyright 2012 The Authors

DOI: doi:10.1111/j.1467-6281.2012.00368.x

Abstract

We explain and demonstrate a disciplined and systematic approach to repeatable modelling using forecast criteria, in addition to the usual statistical estimation criteria, to identify value relevance in regressions of the market-accounting relation. The method was used in Cooke et al. (2009). It is illustrated here in the case of a single firm over a 59-year period. Market and accounting data for the U.S. firm Abbott Laboratories Inc. from 1955 are modelled using a testing-down, error correction approach. Hold-out samples of 10 to 15 years are used to assess forecasting performance relative to a random walk. Emphasis is placed upon the use of simple, directly observable and theory-independent model variables that can be replicated with other sample data. In this case, logarithmic transformations of all variables have to be computed in order to achieve correct statistical specification, implying a multiplicative relationship in the raw data. The strongest cointegrating accounting variable with forecasting ability for Abbott's market value is earnings. The model parameters exhibit long-run stability and the accounting regressor marginally improves forecasts of market value compared to a random walk, demonstrating ‘value relevance’.

Item Details

Item Type:Refereed Article
Keywords:capital market research, dynamic modelling, error correction, value relevance
Research Division:Commerce, Management, Tourism and Services
Research Group:Accounting, Auditing and Accountability
Research Field:Accounting Theory and Standards
Objective Division:Economic Framework
Objective Group:Measurement Standards and Calibration Services
Objective Field:Measurement Standards and Calibration Services not elsewhere classified
Author:Willett, RJ (Professor Roger Willett)
ID Code:83614
Year Published:2012
Web of Science® Times Cited:2
Deposited By:Accounting and Corporate Governance
Deposited On:2013-03-19
Last Modified:2013-05-07
Downloads:0

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