The Equity Prices and Accounting Variables: the Role of the Most Recent Prior Period's Price in Value Relevance Studies

Considering reformulation of the Ohlson (1995) model, this book demonstrates how to improve the empirical specification of value relevance models that explore the relevance of accounting information by accommodating the most recent prior period?s equity price as an additional explanatory variable. When the model specification is improved by including the most recent prior period?s price as an additional explanatory variable, current trailing earnings are shown to be at best marginally value relevant when empirically explaining share prices in value relevance regression models. This book also demonstrates that inclusion of the most recent prior period?s price as an additional explanatory variable eliminates the scale problem in value relevance models whereby the scale (or size) of dependent and independent variables in value relevance studies affects the apparent explanatory power of the models. Therefore, this book specifically indicates that value relevance studies that use the Ohlson (1995) model should use, for econometric reasons, change in price or else returns, not the price level, as the dependent variable.