Fair Value and Valuation Models

Authored by: Anne Cazavan-Jeny

The Routledge Companion to Fair Value and Financial Reporting

Print publication date:  May  2007
Online publication date:  August  2012

Print ISBN: 9780415423564
eBook ISBN: 9780203815151
Adobe ISBN: 9781136713101


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It is frequently argued that using fair value rather than the traditional historical cost method in preparing financial statements would give better information on a company’s current and future performance, and would increase the value relevance of financial statements, providing a better basis for management decision-making (see Chapter 4). This assertion raises questions regarding the link between accounting income or book values and the company’s market value. While several studies (e.g. Lev 1989) reveal such links based on traditional financial statements, they also show that these links are complex and far from stable over time. The Ohlson(1995) model and the Feltham-Ohlson (1995) model (see also discussion in Chapter 5) may be considered as a sort of culmination of research on the subject. In this model, market value is dependent on book value, a multiple of abnormal operating earnings, an adjustment related to the conservatism principle and the effect of ‘other information’ (such as R&D disclosures). While various studies validate the model and demonstrate the usefulness of traditional financial statements, this does not preclude the relevance and possible superiority of accounts presented totally or partially in fair value.

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