Stationarity and cointergration tests of the Ohlson model

• Published in: Journal of accounting, auditing & finance Vol. 15; no. 2; p. 141
• Main Authors: Qi, Daqing D, Y Woody Wu, Xiang, Bing
• Format: Journal Article
• Language: English
• Published: Boston Warren Gorham Lamont 01-04-2000
• Subjects: Book value; Cointegration analysis; Market value; Regression analysis; Studies; Time series; United States > US
• ISSN: 0148-558X; 2160-4061

This paper investigates the time-series properties of the Ohlson (1995) model and examines their implications for empirical studies that use time-series data but do not explicitly account for such properties. It is shown that the null hypothesis that market value and book value are nonstationary cannot be rejected for most of the sample firms. More importantly, book value and residual income do not cointegrate with market value for 80% of the sample firms. The importance and relevance of the time-series properties of the model to OLS regression is demonstrated by showing that the OLD out-of-sample forecasts of market value are significantly more accurate and less biased for the cointegrated firms than for the non-cointegrated firms.