Testing the Building Blocks of the Ohlson-Feltham-Ohlson Models

We analyze the empirical pattern of the Ohlson models (1995) focusing on four basic implicit assumptions that support the model: (i) the displacement property, (ii) the goodness of book value as a proxy of the ability of assets and liabilities to generate cash flows, (iii) the conservatism correction value, and (iv) the clean surplus relation. We test the long-term equilibrium relations on the Dow Jones Composite Index companies, using an Error Correction Model when non-stationary variables are present and a cointegration relation exists. The results show that for only slightly more than 10% of the companies we cannot simultaneously reject the four assumptions