The Ohlson and Feltham Ohlson Models

Matias Gama A.P.; Segura L.C.; Milani Filho M.A.F.

The Ohlson and Feltham Ohlson Models

Tipo

Capítulo de livro

Data de publicação

2017

Periódico

Accounting, Finance, Sustainability, Governance and Fraud

Citações (Scopus)

1

Autores

Matias Gama A.P.
Segura L.C.
Milani Filho M.A.F.

Resumo

© 2017, Springer Nature Singapore Pte Ltd.This chapter analyses the phenomenon of “positive valuation of losses” in the new economy companies in the US. One of the potential explanations of this phenomenon is that these companies are start-up companies, mostly technology-based, that invest massively in intangible assets, in particular research and development (R&D) and advertising. Under Generally Accepted Accounting Principles (GAAP), these investments should be considered at full cost in the year they occur. Thus, in this chapter, we analyse the Ohlson (OM) (Contemp Acc Rev 11(2):661–687, 1995) and Feltham and Ohlson (FOM) (Contemp Acc Rev 11(2):689–731, 1995) valuation models. Feltham and Ohlson (Contemp Acc Rev 11(2):689–731, 1995) demonstrated analytically, using dynamic information, that losses, particularly at the stage of start-up in growth and technology-based companies, are considered to be costs that create an effect of conservatism accounting, consequently, there is an undervaluation of assets, hence the results and equity. However, this situation tends to be reversed over time, because given the principle of rationality, the investors continue to invest in the company if those investments are associated with abnormal profitability expectations.