Comparative study of Ohlson and cash flow discounting models in the prediction of the stock price

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Abstract

Two models derived from the dividend discount model attracted the attention of researchers: the residual income model (RIM) and the Ohlson model. These models are said to be dualistic since they combine both aspects of the economic and accounting vision. We propose, in our study, to test the performance of the dualistic evaluation model and to show the importance of accounting information. To do this, we will calculate the value of a listed company according to the actuarial valuation model, namely: the available cash flow discounting model (DCF) and the Ohlson model as a dualistic model. Then, we will determine, based on the expectation and the variance of the signed prediction error (SPE), the model that comes closest to the market price in the case of a Tunisian listed company. The results found in the Tunisian context show the superiority of the Ohlson model in the prediction of stock market prices. This model underlies the traditional belief that the company value is compounded of two main parts: the net value of the investment made in it (book value) and the present value of the period benefits (earnings) that together bring the “clean surplus” concept of the shareholders’ equity value. Specifically, Ohlson (1995) motivates the adoption of the historical price model in value relevance studies, which expresses value as a function of earnings and book values.

Keywords: Value, Ohlson Model, Available Cash Flow Discount Model, Performance, Share Price Forecast

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G14

Received: 04.11.2020
Accepted: 05.02.2021
Published online: 09.02.2021

How to cite this paper: Nasfi Salem, F. (2021). Comparative study of Ohlson and cash flow discounting models in the prediction of the stock price. Corporate Ownership & Control, 18(2), 162-168. https://doi.org/10.22495/cocv18i2art13