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2 BRAZILIAN BUSINESS REVIEW Vol. 1, No pp The Ohlson Model of Evluion of Compnies: Tuoril for Use i Césr Medeiros Cuperino Universiy of Brsíli Pulo Robero Brbos Lusos Universiy of Brsíli ABSTRACT: The ricle nlyzes he srucuring nd pplicbiliy of he Ohlson Model (MO). The mehodology used considered: (i) explorory reserch s o he objecives of he sudy; (ii) bibliogrphicl reserch s o he procedures pplied; nd (iii) quliive reserch s o he ddressing of he problem. The review of he lierure covered boh he origin (discoun of dividends, evluion by he residul profi ec) nd he underlying heory of he model. In relion o he inernl consisency of he MO, he srucuring of he liner informionl dynmics ws discussed (DIL) nd he formul of evluion s well s he esblishing of he enries demnded (prmeers nd vribles). An exmple ws lso developed h illusres he inercion beween he coefficiens, vribles nd prmeers of he Ohlson modeling. The exmple permied he explorion of fundmenl conceps nd premises for he opering of he Ohlson model, underlying he equions of he DIL (self-regressive models, prmeers of persisence ec), o he behvior of he profis (persisence nd biliy o forecs), o he scenrio of evluion nd o some specs of he ccouns model (role of he ne worh ec). The sudy concluded h: (1) here is no consensus in he cdemic lierure bou he pproprie mehod of mesuring he prmeers of persisence; (2) here re proposiions for perfecing he originl concepion of he MO by mens of exensions o he model; (3) he Ohlson model propiied series of conribuions in he cdemic lierure bou cpil mrkes. Key-words: evluion of compnies, Ohlson Model. i This ricle wes presened he 4h USP Congress of Conollership nd Accouning. 1

3 The Ohlson Model of Evluion of Compnies: Tuoril for Use 2 I. INTRODUCTION vluion of compnies is one of he principl demnds in reserch bou cpil E mrkes (KOTHARI, 2001). Bodie nd Meron (2002) nd Dmodrn (1999) highligh h he biliy of evluing sses wih precision is he her of he heory of finnces becuse mny personl nd business decisions cn be mde by he selecion of lernives h mximize he vlue. Fernández (2001) ses h he evluion cn be used for vrious purposes mongs which: o deermine he iniil price of n IPO (Iniil Public Offering); o serve s prmeer of comprison of he shres negoied in sock exchnges, o qunify he creion of vlue h is ribuble o he execuives of he compny (nd hus give hem bonuses); o help in he sregic decision mking (decision o coninue in he business, o sell, expnd, merge or buy oher compnies). A series of relevn quesions cn pply in he sk of evluing n invesmen: mrke efficiency, forecss of nlyss nd cos of opporuniy re some of hem. In some models here re emps o cpure he inercion of hese quesions in evluion formuls, wih mehodologicl pproches h vry in degree of complexiy ii. As o his spec, Ohlson (1995) presened formulion derived from he clssicl concepions h used ccouns vribles in he funcion of evluion. The srucuring ws bpized Ohlson Model (MO) nd hd gre impc in he cdemic reserch bou cpil mrkes. Acquined wih he inense discussions bou his model in foreign lierure, he Ohlson model sill is n incipien subjec in Brzil (LOPES, 2001). Excepions repose in some few works wih predominnly quniive focus nd h in he mjoriy of cses do no consider h which is he innovion proporioned by he model: he premise of he liner informionl dynmics. In his sense he ricle mkes n incursion ino he Ohlson model wih he inui of proporioning beer comprehension of h which i represens nd of he wy h he vribles inerc in he evluion funcion. The res of he sudy is found orgnized s follows: secion 2 offers he heoreicl bsis, secion 3 describes he mehodology pplied, secion 4 focuses on he Ohlson model (srucuring nd enries demnded); secion 5 demonsres he exensions o he model nd secion 6 concludes he work. II. THEORETICAL BASIS The heory of finnces describes he vlue of he compny in erms of expeced fuure dividends (PENMAN; SOUGIANNIS, 1998), being he model of discoun of dividends (MDD) he bsic nd heoreiclly correc pproch of evluion (PLENBORG, 2000). Is forml represenion is given by: = τ = 1 τ ~ E d where: p is he mrke vlue of he compny on de ; p d ~ +τ is ssumed o represen he ne dividends in + τ; R is he discoun re r (re free of risk) plus 1, indiced s consn; R + τ (1) ii One sees he exisence of simple models (of he uni-vried wy or rndom-wlk) nd sophisiced models (of he muli-vried ype nd self regressive processes of muliple order). Brzilin Business Review

4 The Ohlson Model of Evluion of Compnies: Tuoril for Use 3 E mens he operor of expecion bsed on he informion vilble on his de. The formul focuses he problem of evluion in he perspecive of he invesor: on buying pr of he ne worh of he compny, he invesor expecs o receive dividends referen o his porion. The vlue of he frcion h belongs o him mus be equl o he presen vlue of he flow of dividends (ANG; LIU, 1998). Wih his consrucion he MDD consiues he rdiionl focus for evluion of compnies in he economic nd finnces lierure (ANG; LIU, 1998), being used s foundions in he formulion of oher models, s for exmple he evluion by he residul profi (ALR). For Lo nd Lys (2000), he ALR reposes on he simple hypohesis h he vlue of he compny represens he presen vlue of ll fuure dividends. The model of evluion by he residul profi ws lrgely ignored in specilized lierure. Is reppernce consiues mjor conribuion o modern ccouning (LUNDHOLM, 1995). By he use of profis, ccounble vlue of he PL nd he relionship Clen Surplus, he MDD is re-wrien s model of discoun of ccounble numbers. In is mos fr reching form he model expresses he vlue of he compny s he sum of is cpil invesmens nd he presen vlue discouned from he residul profi of is fuure civiies.. Thus, p = b + τ = 1 R τ E ( x ) where: b is ssumed o represen he ccounble vlue of he PL on de ; x + τ denoes he residul profis in he period + τ. Equion (2) shows h he vlue of he compny cn be divided ino wo prs: one ccouns mesure of cpil invesed - b - nd mesure of he vlue of he expeced residul τ = 1 τ profis - R ( ) E x + τ + τ. This ls prcel is defined s he presen vlue of he flows of he fuure economic resuls sill no incorpored ino he ne worh curren ccouning. If he firm obins fuure resuls he sme re s is desired remunerion of he cpil (represened by he discoun re r), hen he presen vlue of he fuure residul profis will be zero. In oher words, for he compnies h do no cree or desroy welh, he vrible of relevnce for he evluion will only be is ccounble vlue of he ne worh. In urn, he residul profi of he period is defined s he moun h he firm gins in excess of he discoun re pplied on he ccounble vlue of he PL of he previous period ( 1). The erminology ws moived by he concep h norml profi mus be reled o he norml reurn on cpil invesed he sr of he period, h is, he ccounble vlue of he PL on he de -1 (OHLSON, 1995). In his wy he residul profi is inerpreed s he profi iii diminished from he chrge on he use of cpil. ( b ) x (3) = x r 1 where r is he discoun re nd x he ccounble profi ( 1, ). (2) iii In his cse he mple or fr reching profi (comprehensive income). Brzilin Business Review

5 The Ohlson Model of Evluion of Compnies: Tuoril for Use 4 As described, he concep imposed by equion (3) permis one o conclude h posiive vlue of residul profi indices lucrive period for he compny in he mesure in which he ccounble re of reurn exceeds he cpil cos of he firm. To derive ALR from he MDD, wo ddiionl premises re necessry (LO; LYS, 2000). The firs refers o he dopion of n ccouns sysem h sisfies he relionship Clen Surplus (Clen Surplus Relion CSR). The CSR is resricion in he relionship beween ccounble profis ( x ), ccounble vlue of he PL (b) nd ne dividends (d) in he period (Myers, 1999). Essenilly, CSR is condiion imposed so h ll he ne worh vriions rnsi hrough he resul. Is mhemicl noion is given by: b = b 1 + x d (4) This represenion of profis is gre dvnce over he previous consrucions (LUNDHOLM, 1995). The formul ies profis nd ccounble vlue of he PL in he sme equion nd implies h he goodwill is equl o he presen vlue of he expeced fuure residul profis (OHLSON, 1995). A consequence of is dopion in ALR is he independence in relion o specific ccouning sysem. Given flow of fuure dividends, he vlues of b nd of x cn be ken by ny rndom numbers. The sserive is susined in he fc h b is upded ccording o equion (4) nd he relionship of evluion in equion (2) will ke chrge of producing he presen vlue of he flow of dividends (DECHOW e l., 1999, p. 4). The second premise o derive he ALR from he MDD is condiion of regulriy h imposes h n ccounble vlue of he PL increses lesser re hn R. Brzilin Business Review R τ τ ( ) 0 E b + τ The ALR model connecs he evluion of compnies o observble ccounble d pr from bsing iself on simple mhemicl consrucions (LO, LYS, 2000). The sudy promoed by Ohlson (1995) chrcerizes model of residul profi similr o he ALR. In spie of he originl ALR neceding he MO by mny decdes, Ohlson offered he possibiliy of reposiioning he focus of he ccouns reserch on evluion of compnies esblishing forml connecion beween he ALR nd proposiions provided by n ddiionl srucure denomined liner informion dynmic (DIL). III. METHOLDOLOGY AND SOURCE OF DATA As o he objecives, he ricle clssifies iself s explorory reserch. Beuren (2003, p. 80) highlighs h one seeks, wih he explorory sudy, [...] o know he mer wih greer deph, so s o mke i clerer [...] nd dds: [...] o explore subjec mens o gher more knowledge [...], s well s o seek new dimensions up o hen unknown. (BEUREN, 2003, p. 81). Pinsonneul nd Kremer (1993 pud HOPPEN e l., 1996) highligh h he explorory reserch is n elucidive wy o nlyze new conceps. The sudy minins such orienions: i ddresses subjec sill lile explored in nionl lierure nd criiclly nlyzes he model in is pplicbiliy nd empiricl esbiliy. As o he procedures, bibliogrphicl reserch ws used. Cervo nd Bervin (1983) ech h he bibliogrphicl reserch: [...] explins problem from he heoreicl references published in documens. I cn be done independenly or s pr of descripive or

6 The Ohlson Model of Evluion of Compnies: Tuoril for Use 5 experimenl reserch. Boh he cses seek o know nd nlyze he culurl or scienific conribuions of he ps, exisen bou deermined mer, heme or problem. In bibliogrphicl reserch ll referenil published serves s source of consulion: ricles from periodicls, mgzines, books, heses ec (BEUREN, 2003). Given he scrce nionl lierure exisen bou he Ohlson model, he reserch ws essenilly bsed on foreign publicions, nobly periodicls iv nd books. Addiionlly, serch ws mde on he world nework of compuers - Inerne involving key-words bou he heme v. As o he pproch of he problem, he ricle clssifies iself s quliive reserch. Beuren (2003, p. 92) highlighs h: In he quliive reserch deeper nlyses re conceived in relion o he phenomenon h is being sudied. The quliive pproch ims highlighing chrcerisics no observed by mens of quniive sudy, seeing he superficiliy of he ler. Vn Mnen (1983 pud HOPPEN e l., 1996) eches h he quliive mehodologies re consiued by se of inerpreive echniques. Hoppen e l. (1996) dvoce h he quliive reserch is complex for being bsed on words nd no on numbers. Now Richrdson (1999) highlighs h he difference beween quliive nd quniive reserch is h he ler employs sisicl insrumens s he bsis of he process of nlysis of he problem wheres he oher does no hve his ppel. IV. THE OHLSON MODEL 4.1 Srucuring Considering he exisen heory, Prof. Jmes Ohlson sw he possibiliy of srucuring model of evluion susined by he relionship of cler profi (CSR), where ccounble vribles hd n ousnding role. He oriened himself in he model of evluion by he residul profi nd esblished 3 premises: (i) he MDD deermines he mrke vlue considering he neurliy o he risk; (ii) rdiionl ccounncy h sisfies CSR is pplied; (iii) he MO defines he sochsic behvior of x. In (i), he premise considers he use of he presen vlue of he fuure dividends discouned joinly wih he propery of irrelevnce of he dividends o define he shre prices. Now in (ii), formul (4) gurnees he consisence of he deerminion of profi independenly of he ccouning sysem doped. For he sochsic behvior of x some considerions re necessry. Ohlson (1995) nd Lundholm (1995) emphsize h he empiricl implicions of he model criiclly depend on his ls premise, reled o he informionl dynmics of he residul profis. Is funcion is o pu resricions in he Sndrd model of discoun of dividends. Seen from n empiricl perspecive, he firm coninues being evlued by he MDD wih he differenil of he nure of he relionship beween he curren informion nd he discouned vlue of he iv As o he periodicls, he reserch included he consulion, mongs ohers, of he following: Conemporry Accouning Reserch; Journl of Finnce; The Accouning Review; Journl of Accouning, Audiing nd Finnce; Journl of Accouning nd Economics; Journl of Accouning Reserch; Journl of Business. v Some of he erms conssuled were: Residul Income Vluion; Liner Informion Model; Liner Informion Dynmics; Ohlson s Model; Edwrds-Bell-Ohlson; EBO. Brzilin Business Review

7 The Ohlson Model of Evluion of Compnies: Tuoril for Use 6 fuure dividends being esblished. The sochsic process h defines he hird premise is known s Liner Informion Dynmics, or dynmics of liner informion (DIL) nd is given by he equions: ~ x ω x + ν ~ ε (5) + 1 = + 1, + 1 ~ ν γν ~ ε (6) + 1 = + 2, + 1 where x is he bnorml profi (or residul profi ) for he period ; ν mens oher informion bou expeced fuure residul profis h re observed he end of period bu were sill no recognized by he ccouning; ω nd γ re prmeers of persisence ; ~ε 1 nd ~ε 2 represen he erms of sochsic errors ssumed for hving men zero nd norml disribuion. The DIL represens he gre conribuion of Ohlson for he reserch of evluion of compnies (FUKUI, 2001). Is consrucion is bsed on he presupposiion h he informion bou he fuure residul profis is obined boh from he ps series of he bnorml profis nd of d sill no cpured by he ccouning (MCCRAE; NILSSON, 2001). The wo dynmic equions re combined wih CSR o gurnee h ll he relevn evens reling o he vlue of he compny re bsorbed by he profis nd ccounble vlue of he PL (OHLSON, 1995). One ssumes h x nd ν follow self regressive process of single inervl nd h he prmeers of persisence ω nd γ re boh resriced for being no negive nd less hn 1. As o he Oher informion, Lundholm (1995) eches h hey refer o non ccounble informion h proporion chock in he residul profis in fuure periods. Ohlson (1995) ssumes h ν mus be considered s summry of he relevn evens for he evluion of he compny h will sill cuse n impc on he finncil semens. Bsed on he ALR nd on equions (5) nd (6), Ohlson obins he funcion of evluion: p b +α 1x + α 2 = v (7) ω R where α1 = nd α 2 =. ( R ω) ( R ω)( R γ ) Wih hese consrucions Ohlson imposed n ddiionl srucure in he ALR so h he evluion could be expressed s funcion of he conemporneous ccounble d nd no longer only in predicions (LEE, 1999 e LO; LYS, 2000). Differenly o some rdiionl models (MDD nd Discouned Csh Flow), he evluion formul of Ohlson given by equion (7) does no require explici forecss of fuure dividends nor of ddiionl premises of clculion of he erminl vlue (DECHOW e l., 1999). Two observions reled o he coefficiens α 1 nd α 2 help o undersnd he funcionliy of he model. Forω > 0, he wo coefficiens re posiive simply becuse he predicions E [ ~ x + τ ], for ny τ > 1, rele posiively wih x ndν. The exreme cse of ω = 0 implies h E [ ~ x + τ ] is independen of x nd herefore p cnno depend on x (OHLSON, 1995). Addiionlly, he funcions α ( ) nd α ( ω, ) rec in n incresing wy o heir 1 ω 2 γ Brzilin Business Review

8 The Ohlson Model of Evluion of Compnies: Tuoril for Use 7 rgumens, h is, high vlues of ω nd γ mke ν. p more sensiive o he relizions of x e The MO sill incorpores properies of Modiglini nd Miller (1961), which re: (i) dividends ffec he mrke vlue on he dollr-o-dollr bsis, implying he premise of he irrelevnce of he pymen of dividends; (ii) he dividends pid in he curren period would negively influence he expeced fuure profis. Combined, he wo properies indice h he dividends reduce he ccounble vlue of he PL bu do no influence he curren profi (OHLSON, 1995). 4.2 Enries Required In he deerminion of he prmeers of he Ohlson model, some of he necessry d is promply vilble wheres ohers mus be esblished. Specificlly, he model depends on: (i) hree vribles: he ccounble vlue of he PL in he curren period - b, profis in he curren period - x - nd oher informion in he curren period - ν ; (ii) hree prmeers: ω ndγ, which re prmeers of persisence, nd r, which is he discoun re. Accouns repors such s he Primonil Blnce Shee, Income Semen of he Period nd Semen of Chnges in he Ne Worh - supply he bsis for he fixing of he firs wo vribles ( b nd x ). The remining vrible ( ν ) nd he hree prmeers re more difficul o be mesured. Ohlson (1995) offers lile or no orienion s o how o obin he vrible ν nd he prmeers of persisence ω ndγ. The sk herefore remined releged o fuure reserch. In his conex diverse mehodologies or proxies were suggesed in cdemic works h esed he MO Esblishing he Discoun Re (r) In he sk of evluion i is necessry o idenify discoun re h convers flows h will be relized (or one expecs hey will be relized) ino presen vlues. There re vrious wys of mesuring r nd he lierure bou he heme is exensive. Approches include he cos of own cpil, he verge pondered cos of cpil, he re of reurn on he PL or on he sse, mongs ohers. The deiled discussion of ech one of he possible focuses o deermine he discoun rnscends he objecive o his ricle. vi. The MO ssumes h r is defined in non sochsic wy, considering neurliy o he risk nd homogenous beliefs (OHLSON, 1995, p. 665). The discoun re used in vrious empiricl works on he Ohlson model is he re of reurn of he Ne Worh (DECHOW e l., 1999; FRANKEL; LEE, 1999). Mrins (1998) reminds us h his procedure is debble poin since he invesors hve difference opinions wih respec o he minimum profibiliy expeced for he compny. vi Exmples of some pproches (model of hree fcors nd re of reurn by indusry) cn be obined in he works of Fm nd French (1997, 1998). Brzilin Business Review

9 The Ohlson Model of Evluion of Compnies: Tuoril for Use Esblishing Oher Informion ( ν ) Kohri (2001) reminds us h he curren performnce of he compny (such s presened in he ccouns repors) is n imporn, bu no he sole, source of informion for he evluion of he mrke vlue of he compny. Dechow e l. (1999) remind us h for some ime he cdemic lierure hs recognized h he shre prices reflec informion bou fuure profis h re no conined in he curren profis. Such informion cnno be observed direcly (OHLSON, 2001, p. 112). Cndides for his oher informion ( ν ) re new pens, pprovl of lws for new medicmen in phrmceuicl compnies, long erm conrcs, mongs ohers (MYERS, 1999). Aemps o incorpore ν wihin he nlysis of evluion go bck les o he yer of 1980 wih he work of Bever e l. (1980). Ohlson (1995) defines oher informion s scle vrible, however, he does no concreely esblish is nlyicl conen. Recenly he very Ohlson (2001, p. 112) referred o ν s myserious vrible. The lck of definiion of he vrible oher informion cused mny reserchers o neglec is use in he ess on he MO (BEAVER, 1999, p. 38). As o his spec, Hnd (2001, p. 122) highlighs h up o 1998 lmos ll empiricl reserch on he MO disdined he informionl conen ofν. The few ricles h did no leve side he vrible oher informion chose n inuiive ph insed of forml consrucion (exmples include AMIR nd LEV, 1996 pud HAND, 2001 nd MYERS, 1999). Ohlson (2001) susins h lhough here my be n nlyicl ineres in no specifying he vlue ofν, such procedure reduces he empiricl conen of he MO. He lso highlighs h consensul forecss of nlyss consiue resonble ool o mesure he expeced fuure profis nd h here is no resons o elimine ν from he model since he vrible cn be bsed on observble d vii. Hnd (2001) dds h o consider ν equl o zero is o mke he heroic sserive h he ccouns d publicly vilble re sufficien o explin he shre prices Esblishing he prmeers of Persisence (ω ndγ ) The liner dynmics presened by Ohlson (1995) define he relionship beween curren nd fuure informion using self regressive process of he firs order AR (1). The residul profi of he following period ( x + 1 ) is funcion of he residul profi of he curren period (djused by coefficien of correcion denomined prmeer of persisence), oher informion ( ν ) nd erm of error ( ε 1, + 1 ). In urn, oher informion of he following period ( ν + 1) is funcion of oher informion of he curren period (lso djused by coefficien of correcion) nd erm of error ( ε 2, + 1 ). The prmeer of persisence of residul profis is indiced by he noion ω nd γ nd he prmeer of persisence of oher informion. Ohlson does no esblish crieri o obin ω or γ, resricing himself o declring h he economic medium nd he ccouns principles of he compny deermine he exogenous prmeers ω nd γ (OHLSON, 1995, p. 686). Also insiues h such prmeers mus no be negive or greer hn 1 (one). Such prmeers re direcly used in he deerminion of he coefficiens of he funcion of evluion proposed by Ohlson (1995), vii Forecss of nlyss for exmple. Brzilin Business Review

10 The Ohlson Model of Evluion of Compnies: Tuoril for Use 9 s seen in equion (7). The coefficien α 1 is funcion of ω nd α 2 is funcion of ω nd γ. In recen ricle h ddresses he empiricl perspecive of is model, Ohlson (2001, p. 115) declres h reserchers mus ry o esime he vlue of ω ndγ, wihou indicing how his could or should be done. The work of Dechow e l. (1999) is referenced by Ohlson s one of he empiricl sudies of he MO h evlues he ribues of he model in closer wy (OHLSON, 2001, p. 108). In he esblishing of he prmeers of persisence, Dechow e l. (1999, p. 7) consider he hisoricl smple esimes of ω ndγ Esblishing he Vribles b nd x Ohlson (1995) uses well known conceps obined from ccouns repors such s he profi ( x ) nd he vlue of he ne worh ( b ). However, for use of he vribles x ndb, he MO imposes resricion of he relionship Clen Surplus (CSR) viii, h hs direc reflex on he quliy of he ccouns d Source of D Implicions of regulory nure deermine imes he requiremen of publicion of ccouns semens ix. Compnies nd specilized periodicls disclose informion bou he mcroeconomic environmen nd res of reurn, mongs oher d of ineres. Informion providers keep curren nd hisoricl d s well s forecss of compnies nd of mrke segmens. The vilbiliy of compuionl d bses (reling o he finncil informion of he compnies) simuled rpid growh in ccouning reserch in he cpil mrke (BROWN, 2001). The Unied Ses of Americ (USA) ws pioneer in he consrucion of hese ypes of d bses (BROWN, 2001). In foreign lierure x, one sees he frequen use of he following sources of d xi : 1. Forecs of Profis: In he USA here re vrious eniies h underke o provide he esime of fuure profis of compnies. Vlue Line hs published is esimes since he decde of he 70 s. Sndrd & Poor s hs published is forecss weekly from 1967 o 1987, in bullein clled Ernings Forecser. Oher compnies h mke forecss of profis re: Insiuionl Brokers Esime Sysem (I/B/E/S), originlly published by Lynch, Jones nd Ryn, nd Zcks Invesmen Reserch (The Icrus Service). 2. Accouns nd Finncil D: COMPUSTAT offers hisoricl d (from 1987) of pproximely 22,000 compnies hedqurered in he USA (cive or no). Now he Cener for Reserch in Securiy Prices (CRSP) is cener of finncil reserch of he Universiy of viii Described in equion (4). ix In Brzil in he cse of limied libiliy corporions of open cpil, his requiremen cn be conferred in r. 289 of Lw 6.404/76 nd wih he new wording given by Lw nº 9.457, of , which ses forh hus: The publicions ordered by he presen Lw will be done in he officil orgn of he Union or he Se of he Federl Disric, ccording o he plce in which he hed office of he compny is siued, nd in noher neewspper of lrge circulion published in he plce in which he hed office of he compny is siued. x Priculrly Norh Americn xi All he providers cied re compnies hedqurered in he USA. Brzilin Business Review

11 The Ohlson Model of Evluion of Compnies: Tuoril for Use 10 Chicgo h hs d bnk of he shre mrke (prices, indexes ec) of compnies negoied in he principl Norh Americn Sock Exchnges (NASDAQ, AMEX, NYSE). 4.3 Hypoheicl exmple The exmple ws developed in he emp o reproduce n pplicion of he Ohlson model. I should be highlighed h he d nd he environmen imgined re hypoheicl nd herefore subjec o he limiions inheren o he specificions of his species. One sough o privilege he didcic spec in derimen o more rigorous specificion (greer horizons of forecs nd of he emporl series of profis nd ne worh, inclusion of forecs of he dminisrion ec). The scenrio where he illions re developed, pr of he exisence of mellurgicl compny, Crol Inc., h hs been priciping in he indusry of mels nd lmines for 20 yers. An efficien mrke is dmied in semi-srong form. For he segmen of civiies n verge re of reurn on own cpil of 7% ws seen. Addiionlly, he following informion is supplied in TABLE 1: TABLE 1 Avilble de of Crol Inc. Temporl Series Profis Dividends Forecs of profi* ,6 Noe: * The forecss of profis refer o consensul esimes of nlyss. Brzilin Business Review

12 The Ohlson Model of Evluion of Compnies: Tuoril for Use 11 The ne worh of he compny ws $100 in he period -6. Tking he exisen informion s bsis one cn obin he resuls shown in TABLE 2: TABLE 2 Clculed D of Crol Inc. Ne Worh* b = b 1 + x d ) ( Norml Profi** ' x b 0,07 ( ) = Residul Profi x = x x ( ) Persisence Residul Profis*** δ = x ( ) x 1 ' Error of Forecs **** (Forecs - Observed) / Observed Reurn on PL (ROE) ( ROE = x b ) ROE Residul***** ROE res = ROE r ( ) Dividend Pymen Re ( k ) ( k = d x ) Temporl Series Noes: * Clculed in ccordnce wih he relionship Clen Surplus see equion (4). ** The noion x ws used for norml profi. ' *** The noion δ ws used for he persisence in residul profis. **** Clculed in ccordnce wih he mehodology suggesed by Frncis e l. (2000). ***** ROE residul ws defined s ROE res nd he discoun re s "r". The hisoricl series of TABLE 2 ws used for he clculion of he prmeer of persisence ω. One sees he exisence of residul profis in ll he periods nd heir persisence, on verge, ws pproximely 98% in relion o he immediely previous period. In period, he compny promoed he implnion of new boiler pr from rining progrm for he reducion of he wse mer of producion, nd work ccidens. The dminisrion is confiden h such cions will hve posiive repercussion in he Brzilin Business Review

13 The Ohlson Model of Evluion of Compnies: Tuoril for Use 12 produciviy of he compny. Bsed on his informion he nlyss forecs n ddiionl resul of $2 per period in Crol Inc. However, i is known h he informion of he nlyss hs bis (men) o below -18%. The vrible ν ws clculed s being $ 2.36 nd he prmeer of persisence γ equl o one. The clculion of he coefficiens of he formul of evluion - equion (7) reurned vlue of for α 1 nd forα 2. By he formul he vlue of he compny would be $562.5: p p ( 10,89 3,69) + ( 169,84 2,36) = 121,5 + =562,5 The exmple offers noion of how he prmeers nd vribles involved in he Ohlson modeling inerc. The formul of evluion reurned he inrinsic vlue xii of he compny by he Ohlson model (1995). The comprison of his wih he respecive mrke vlue would be he nex sep o idenify he degree of response offered by he MO for he scenrio imgined xiii. 4.4 Exensions of he Model Reserchers hve gone deep ino he heoreicl sudy of he MO, wih he im of offering more consisen bsis or o propose modificions in he underlying heory of he Ohlson model. Exmples include he remen of Diry Surplus iems in he model of evluion (LO; LYS, 2000); he inclusion of more periods in he self regressive process (OTA, 2000); he incorporion of sochsic re of ineres nd version o risk (ANG; LIU, 1998); he srucuring of non liner informionl dynmic (BIDDLE e l., 2000) ec. Of he work reled o he heory of he MO, hose elbored by he very Prof. Jmes Ohlson, individully or in prnership wih oher reserchers, re highlighed. Conservism, Operionl Asses nd Growh of he PL: concomin wih he publicion of he ricle h esblished he srucuring of he MO, Jmes Ohlson offered n exension of his model, conceived joinly wih Prof. Gerld Felhm. Up o he momen he work of Felhm nd Ohlson (1995) represens he mos noorious exension of he MO nd someimes is referenced s if i were him (LOPES, 2001). The Felhm-Ohlson model (1995) MFO provides differenced remen of finncil nd operionl sses for he purposes of evluion. This seprion is done due o he fc h he ccounncy for he hisoricl cos differs sysemiclly from he fir vlue. The dynmic informion of he MFO differ from hose insiued in he MO, highlighing he inclusion of coefficien h mesures he degree of conservism of he ccounncy nd noher h defines he prmeer of growh of he ccounble vlue of he PL. To reduce he bis conined in he xii According o Myers (1999), inrinsic vlue is equl o he presen vlue of he expeced fuure dividends indiferenly o he policy of pymen of dividends or he quliy of he ccounble numbers s long s he relionship Clen Surplus is observed. (our rnslion nd highlighing) xiii Myers (1999) suggess he use of he mrke vlue s benchmrk for he inrinsic vlue of he compny. In he exmple, obviously, he degree of response of he Ohlson model o he vlue of he compny (by he mrke) cnno be idenified since i is quesion of hypoheicl compny. Brzilin Business Review

14 The Ohlson Model of Evluion of Compnies: Tuoril for Use 13 ccounble profi xiv, MFO ssumes he premise h he residul profis for finncil sses will lwys be equl o zero. Thus one cn simplify he model o focus exclusively on he operionl sses. The simplificion done, no modificion is required for MDD, CSR or ALR. The informionl dynmics of he MFO re differen hn he MO. Wheres his ler couns on only wo DIL xv, he MFO esblishes four; Trnsiory Profis: Ohlson (1999) mkes n nlysis of he concep of rnsiory profis, heir impc on he evluion of he compny using he ALR nd heir difference in relion o he oher iems of profis. He rgues h he ccouns heory nd nlyss of ccouns repors recognize h some sources of profis cn be chrcerized s rnsiory nd h hey need o be sepred or elimined from he income semen of he period. The informionl dynmics nd he formul of evluion were modified o include rnsiory profis, proporioning wy of deling wih his species of profi o esime he vlue of he compnies; Sochsic Ineres Re: he underlying heory of he Ohlson model simplified he role of he risk in he funcion of evluion, ssuming h he invesors re neurl o he risk nd ineres res re fixed nd non sochsic. Recenly, Felhm nd Ohlson (1999) demonsred nlyiclly h i is possible o incorpore he risk boh in he MO nd in he MFO. The procedure consiss of subsiuing expeced fuure residul profis for equivlen cerinies bsed on he version o he risk by he invesor beween he de nd possible evens. The pricing of he risk will depend on he pproprie se of informion referen o he evens nd possible des of he fuure residul profis, o obin he equivlen cerinies. The sudy of Felhm nd Ohlson (1999), however, is silen in he demonsrion of how he invesors nd reserchers cn obin his se of informion. The work of Gode nd Ohlson (2000) lso generlizes he MO o include sochsic ineres res bsing iself on he fc h he chnges in he ineres res re relevn becuse hey modify percepions of he long erm profis. The mos recen sudy (idenified) on he pplicion of he risk in he model of Ohlson is of Bginski nd Whlen (2003). Depreciion: Felhm nd Ohlson (1996) exmined he impc of he policy of depreciion of he compny in he relionship beween he ccouns numbers nd he mrke vlue of he compny. A he sr of he discussions he uhors wrn h he policy of depreciion ffecs he ccounble numbers bu does no hve effec on he mrke vlue of he compny. Specificlly, wheres he ccouning policy mus ffec he represenion of he informion received by he invesors, Felhm nd Ohlson (1996) ssume h i does no ffec he informion relevn vlue received. The sudy idenified policies of depreciion h provide unbised or conservive ccouning, h is, he goodwill no regisered is equl or exceeds zero on verge respecively. I ws lso demonsred h he economic profis re equl (on verge) o he ccounble profis if he ccounncy is no bised or if here is no increse in he vlue of he PL. xiv Resuling from he dely in he recogniion of economic evens by he ccounncy. xv See equions (5) nd (6). Brzilin Business Review

15 The Ohlson Model of Evluion of Compnies: Tuoril for Use 14 V. CONCLUSIONS This work proposes o nlyze he Ohlson model being h he sk consised of idenifying he origin of he model, rising he underlying heory, verifying he enries demnded, o srucure hypoheicl exmple o demonsre he logic involved in he inernl consisency of he liner informionl dynmics nd finlly o idenify he se of he r.. During his course diverse poins were idenified nd debed. Pr of hem is found presened hed under he ile of scerinmens: 1. There is no consensus in he cdemic lierure bou he pproprie mehod o mesure he prmeers of persisence (ω ndγ ). 2. There re proposiions of improving he originl concepion of he MO by mens of exensions o he model. The pproch of he conservism, growh, risk nd rnsiory profis lredy consiued he lis of sudies h foclize on he heory reling o he Ohlson model. 3. The Ohlson model propiied series of conribuions in he cdemic lierure bou cpil mrkes: reli he debe round he evluion by residul profis in he reserch of evluion; gve suppor so h he ccouns numbers could be used in models of evluion; doped more desirble focus on he disribuion of welh for n orienion direced o he creion of vlue for he compny; inensified he ineres in sudies of vlue relevnce h connec ccouning vribles (ccounble vlue of he PL nd profis, principlly) he models of evluion of compnies nd oriened opporuniies for fuure reserch s for exmple sudies h foclize vribles nd prmeers of he Ohlson model. REFERENCES ANG, A.; LIU, J. A Generlized Ernings Model of Sock Vluion. Working Pper, Snford Universiy, BAGINSKI, S. P.; WAHLEN, J. M. Residul Income Risk, Inrinsic Vlues, nd Shre Prices. The Accouning Review, v. 78, n. 1, p , BEAVER, W. H. Commens on An Empiricl Assessmen of he Residul Income Vluion Model. Journl of Accouning nd Economics, v. 26, p , BEAVER, W; LAMBERT, R.; MORSE, D. The Informion Conen of Securiy Prices: Second Look. Journl of Accouning nd Economics, v. 2, p. 3-28, BEUREN, I. M. (Org.). How o Prepre Monogrphic Work in Accounncy: Theory nd Prcice. São Pulo: Als, BIDDLE, G. C.; CHEN, P; ZHANG, G. When Cpil Follows Profibiliy: Non-liner Residul Income Dynmics. [S.l.]: Socil Science Reserch Nework, Avilble : <hp://ppers.ssrn.com/sol3/ppers.cfm?bsrc_id=251188>. Access on 01 Nov. 2002, 23:59:07. BODIE, Z.; MERTON, R. C. Finness. 1. ed. rev. mpl. Poro Alegre: Bookmn Edior, BROWN, P. Cpil Mrkes-Bsed Reserch in Accouning: An Inroducion. [S.l.]: The Universiy of Wesern Ausrli, Avilble : <hp:// Access on 01 Feb. 2003, 15:22:07. CERVO, A. L.; BERVIAN, P. A. Scienific Mehodology: For he Use of Universiy Sudens. São Pulo: McGrw-Hill do Brsil, DAMODARAN, A. Evluion of Invesmens: ools nd echniques for he deermining of he vlue of ny sse. Rio de Jneiro: Quliymrk, Brzilin Business Review

16 The Ohlson Model of Evluion of Compnies: Tuoril for Use 15 DECHOW, P. M.; HUTTON A. P.; SLOAN R. G. An Empiricl Assessmen of he Residul Income Vluion Model. Journl of Accouning nd Economics, v. 26, p. 1-34, FELTHAM, G. A.; OHLSON, J. A.. Vluion nd Clen Surplus Accouning for Opering nd Finncil Aciviies. Conemporry Accouning Reserch, v. 11, p , ;. Unceriny Resoluion nd he Theory of Depreciion Mesuremen. Journl of Accouning Reserch, v. 34, n. 2, p , ;. Residul Ernings Vluion wih Risk nd Sochsic Ineres Res. The Accouning Review, v. 74, p , FERNÁNDEZ, P. Compny Vluion Mehods: The Mos Common Errors in Vluions. [S.l.]: Socil Science Reserch Nework, Avilble : <hp://ppers.ssrn.com>. Access on 19 Oc FRANKEL, R.; LEE, C. M. C. Accouning Vluion, Mrke Expecions, nd Cross- Secionl Sock Reurns. Journl of Accouning Economics, v. 25, p , FUKUI, Y. A D Admissible Ohlson Model. [S.l.]: Socil Science Reserch Nework, Avilble : <hp://ppers.ssrn.com/sol3/ppers.cfm?bsrc_id= >. Access on 11 Dec. 2002, 17:50:27. GODE, D.; OHLSON, J. A. Vluion, Liner Informion Dynmic, nd Sochsic Discoun Res. [S.l.]: Socil Science Reserch Nework, Avilble : <hp://ppers.ssrn.com>. Access on 10 Mr. 2003, 12:17:12. HAND, J. R. Discussion of Ernings, Book Vlues, nd Dividends in Equiy Vluion: An Empiricl Perspecive. Conemporry Accouning Reserch, v. 18, n. 1, p , HOPPEN, N.; LAPOINTE, L.; MOREAU, E. A Guide for Evluion of Aricles of Reserch in Informion sysems, [S.l.]: Adminisrion elecronic mgzine, Avilble : <hp://red.dm.ufrgs.br/red03/red03.hm>. Access on 14 Mr. 2003, 10:37:12. KOTHARI, S. P. Cpil Mrkes Reserch in Accouning. Journl of Accouning nd Economics, v. 31, p , LEE, C. M. C. Accouning-Bsed Vluion: impc on business prcices nd reserch. Accouning horizons, v. 13 (4), p , LO, K.; LYS, T. The Ohlson model: conribuion o vluion heory, limiions, nd empiricl pplicions. Journl of Accouning, Audiing nd Finnce, v. 15, (Summer), p , LOPES, A. B. The Relevnce of Accouning Informion for he Cpil Mrke: he Ohlson model pplied o Bovesp. 1v. 308p. Thesis (Docore in Conrollership nd Accouning). Universiy of São Pulo, LUNDHOLM, R. J. A Tuoril on he Ohlson nd Felhm/Ohlson Models: Answers o some Frequenly Asked Quesions. Conemporry Accouning Reserch, v. 11, p , MARTINS, E. Evluing he Compny (I). IOB: Themic nd Accouning nd Blnce Shees Book, n. 10, 1 s Week Mr., p. 1-6, MCCRAE, M.; NILSSON, H. The Explnory nd Predicive Power of Differen Specificions of he Ohlson (1995) Vluion Models. The Europen Accouning Review, v. 10, n. 2, p , MODIGLIANI, F.; MILLER, M. H. Dividend Policy, Growh, nd he vluion of shres. The Journl of business, v. 34, n. 4, p , MYERS, J. N. Implemening Residul Income Vluion wih Liner Informion Dynmics. The Accouning Review, v. 74, p. 1-28, OHLSON, J. A. Ernings, Book Vlues, nd Dividends in Equiy Vluion. Conemporry Accouning Reserch, v. 11, p , On Trnsiory Ernings. Review of Accouning Sudies, v. 4, p , Brzilin Business Review

17 The Ohlson Model of Evluion of Compnies: Tuoril for Use 16. Ernings, Book Vlues, nd Dividends in Equiy Vluion: An Empiricl Perspecive. Conemporry Accouning Reserch, v. 18, p , OTA, K. A New Improvemen o he Ohlson (1995) Model: Empiricl Evidence from Jpn. [S.l.]: Socil Science Reserch Nework, Avilble : <hp://ppers.ssrn.com>. Access on 03 Mr. 2003, 23:45:15. PENMAN, S. H.; SOUGIANNIS, T. A Comprison of Dividend, Csh Flow, nd Ernings Approches o Equiy Vluion. Conemporry Accouning Reserch, v. 15, n. 3, fll, p , PLENBORG, T. Firm Vluion: Compring he residul income nd discouned csh flow pproches. [S.l.]: Socil Science Reserch Nework, Avilble : <hp://ppers.ssrn.com>. Access on 30 Oc. 2002, 08:54:20. RICHARDSON, R. J. Socil Reserch: Mehods nd Techniques. 3 ed. São Pulo: Als, Brzilin Business Review