Title: Linear information dynamics parameters: market-wide vs. group-wide estimation

Authors: Walid Saleh

Addresses: Department of Business, Arab Open University – Jordan Branch, P.O. Box 1339, Amman 11953, Jordan

Abstract: Over the past two decades, considerable academic attention has been given to testing the relationship between accounting numbers and firm value. The Linear Information Model (LIM) has become popular for testing this relationship. Most studies find that the LIM has a negative bias relative to the stock market. Examples are Dechow et al. (1999), Myers (1999) and Gregory et al. (2005). One common feature of these studies is that they assume that all stocks have the same mean reversion of abnormal earnings. In this paper, I relax this assumption by investigating whether different stocks have different mean reversions of abnormal earnings. The results provide evidence that different stocks have different mean reversions of abnormal earnings and different valuation errors.

Keywords: residual income models; Ohlson model; James Ohlson; mean reversion; abnormal earnings; linear information dynamics; equity; market-wide; group-wide; estimation; accounting numbers; firm value; negative bias; stock markets; valuation errors.

DOI: 10.1504/IJAF.2010.034400

International Journal of Accounting and Finance, 2010 Vol.2 No.3/4, pp.275 - 297

Published online: 02 Aug 2010 *

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