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A UK test of an inflation-adjusted Ohlson model

Gregory, Alan; Saleh, Walid; Tucker, Jon


Alan Gregory

Walid Saleh


This paper conducts a UK test of a version of the Ohlson (1995) model. We should only expect abnormal earnings to revert to zero if the book value of assets is economically meaningful. In this paper we make use of the property revaluations common in UK accounts, but estimate other asset values and earnings in inflation-adjusted terms. This, we argue, gives rise to estimates of abnormal earnings that can reasonably be expected to revert to zero. We then test this modified model on UK data using the Dechow, Hutton and Sloan (1999) method. In line with the predictions of the Ohlson model, we find that these modified abnormal earnings appear to mean revert, and that a first order autoregressive process is sufficient to capture the persistence of UK real abnormal earnings. The modified abnormal earnings model in general predicts one year ahead earnings more successfully than an unmodified model. Furthermore, for much of the sample period, one year ahead predictions of abnormal earnings are better for the real model during periods of higher inflation. The undervaluation problem found in prior studies appears to be replaced with an overvaluation problem in the real model which is more acute during periods of high inflation. Last, we show that an estimate of the model based upon an industry level specification appears to perform no better than a market-wide specification of the model. © Blackwell Publishing Ltd. 2005.


Gregory, A., Saleh, W., & Tucker, J. (2005). A UK test of an inflation-adjusted Ohlson model. Journal of Business Finance and Accounting, 32(3-4), 487-534.

Journal Article Type Review
Publication Date Apr 1, 2005
Journal Journal of Business Finance and Accounting
Print ISSN 0306-686X
Electronic ISSN 1468-5957
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 32
Issue 3-4
Pages 487-534
Keywords inflation, Ohlson model, UK test
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