Discussion of A UK Test of an Inflation-Adjusted Ohlson Model

If the residual income/abnormal earnings (RI) valuation model (RIVM) is implemented using book values plus a series of explicit RI forecasts, it should give the same value estimate regardless of whether it is formulated on an historical-cost or inflation adjusted basis. However, it is possible that...

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Bibliographic Details
Published in:Journal of business finance & accounting 2005-04, Vol.32 (3-4), p.535-547
Main Author: O'Hanlon, John
Format: Article
Language:English
Subjects:
Business forecasts
Cost accounting
Earnings
Economic models
Inflation
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Summary:If the residual income/abnormal earnings (RI) valuation model (RIVM) is implemented using book values plus a series of explicit RI forecasts, it should give the same value estimate regardless of whether it is formulated on an historical-cost or inflation adjusted basis. However, it is possible that the parameters used in the LIM-RIVM could be affected by inflation adjustment, and that the Ohlson LIM-RIVM might work better with inflation-adjusted inputs than with historical-cost inputs. The question address by Gegory, Saleh, and Tucker (GST) of whether inflation adjustment might facilitate implementation of Linear Information Models-RIMV (LIM-RIMV) is an interesting one. Their results indicate that inflation adjustment of accounting inputs has little impact on LIM persistence parameters, and this is a useful contribution to knowledge. More generally, it is important to note that inflation adjustment of historical-cost accounting inputs can involve complexity that may easily outweigh the benefits.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.0306-686X.2005.00603.x