Review of Quantitative Finance and Accounting

, Volume 41, Issue 3, pp 535–547

A fractional cointegration approach to testing the Ohlson accounting based valuation model

Original Research


We examine the long-run relationship between market value, book value, and residual income in the Ohlson (Contemp Acc Res 11(2):661–687, 1995) model. In particular, we test if market value is cointegrated with book value and residual income in light of their non-stationary behaviors. We find that cointegration applies to only 51 % of the sample firms, casting doubt that book value and residual income alone are adequate in tracking variations in market value, yet we find that market value is fractional cointegrated with book value and residual income for 89 % of the sample firms. This implies that the long-run relationship follows a slow but mean-reverting process. Our results therefore support the Ohlson model.


Accounting based valuation The Ohlson model Value relevance Residual income Book value 

JEL Classification

G17 M40 

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Faculty of Finance, College of ManagementYuan Ze UniversityChung-LiTaiwan
  2. 2.School of Accounting, Economics, and FinanceDeakin UniversityBurwoodAustralia
  3. 3.Graduate Institute of FinanceNational Chiao Tung UniversityHsinchuTaiwan

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