Book Value, Residual Earnings, and Equilibrium Firm Value with Asymmetric Information

The residual income valuation model (RIM) by Ohlson (1995) and Feltham and Ohlson (1995) assumes that investors are risk-neutral with homogenous beliefs. Thus, the present value of expected dividends represents firm value. The purpose of the present study is to derive a RIM in a market setting of th...

Full description

Saved in:
Bibliographic Details
Published in:Review of accounting studies 2001-12, Vol.6 (4), p.387
Main Author: Kwon, Young K
Format: Article
Language:English
Subjects:
Accounting
Book value
Capital markets
Dividends
Investments
Liquidity
Market equilibrium
Mathematical models
Present value
Profitability
Profits
Residuals
Studies
Valuation
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The residual income valuation model (RIM) by Ohlson (1995) and Feltham and Ohlson (1995) assumes that investors are risk-neutral with homogenous beliefs. Thus, the present value of expected dividends represents firm value. The purpose of the present study is to derive a RIM in a market setting of the Kyle (1985) type. Since traders are asymmetrically informed in the Kyle setting, firm value is no longer equivalent to the present value of the firm's expected dividends. In the present model, the informed investor observes a signal about the firm's profitability, which the market maker (who sets the price) is unable to observe. The market maker infers the informed investor's private signal based on the total order flow, which is an informative but noisy signal. The analysis identifies the equilibrium firm value as a linear function of current book value, current residual income, and the aggregate order flow. [PUBLICATION ABSTRACT]
ISSN:1380-6653
1573-7136
DOI:10.1023/A:1012445830268