Value Relevance of Historical Information and Forecast Information in China: Empirical Evidence Based on the Ohlson and Feltham-Ohlson Models (2016)

INTRODUCTION The research of firm value and value relevance has been gaining popularity in financial and accounting area for a long time. Value relevance is defined as ability of information disclosed by financial statements to capture and summarize firm value (Sibel Kargin, 2013, p. 71). Research studies on value relevance aim to find out whether there is statistical significance between accounting information and firm value. Firm value refers to the price of company. It is a representation of company in terms of monetary amount. However, with development of modern business model diversification and financial securities market, and if we look at corporate value from various perspectives, meaning could be different. To derive significant relevance between accounting information and corporate value, and to determine how to evaluate enterprise value, one thing to mention here is corporate value that has attracted attention in investment industry, and in case of listed companies, it is stock capitalization. Until middle of 1980s, using return on equity (ROE), earnings per share (EPS), and price book-value ratio (PBR) to calculate enterprise value was mainstream in world of investment industry. In 1990s, models of corporate valuation, prepared by calculating cash flow and cost of capital, emerged, replacing traditional investment style. Economic value added (EVA) and free cash flow (FCF) are typical examples. These models were disseminated through consulting firms and became popular in large companies in United States. Although these firm valuation models partially used accounting data, they denied current accounting data based on accrual accounting theory with a feature that focuses on cash flow. On other hand, accounting information based on enterprise valuation models emerged in middle of 1990s to counter corporate valuation models that are cash flow-based, which attracted considerable attention in academic world. It is called Ohlson model or residual income model (RIM). According to RIM, firm value is equal to sum of book value of equity and present value of future abnormal earnings. This model is successful in expressing stock price and prediction while assuming that ideal situation holds for capital market, including irrelevance of dividend. Therefore, enterprise value evaluation model, which is based on Ohlson model (including Feltham-Ohlson (FO) model that is applied in this paper), has now become a core model of value relevance research. In addition, with development in modern accounting, accounting information can be divided by time. There is historical accounting information that refers to published accounting data of past and forecast accounting information that is artificially predicted by either enterprise managers or analysts about companies' future operations. In China, managers' forecast information is not required to be published for listed companies. Thus, forecast information we discuss here is simply analysts' forecasts. The value relevance of historical accounting information and forecast accounting information could be different, as it has been discussed in previous research studies for developed capital markets. With a great speed of economic growth, China has emerged as one of most important economies in world in 21st century. The Chinese stock market has been emerging for over 20 years, though it is still a young capital market that is under development compared with stock market in developed countries. There is still no widely recognized evaluation model in domestic market yet. The Ohlson and FO models are popular and widely cited in developed countries. This paper aims at examining stock price interpretability using Ohlson and FO models by applying these models to data from Chinese stock market. …