Do Financial Analysts Play a Role in Valuation? Evidence from Asian Stock Markets

Abstract

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 (e.g., Collins et al. 1997; Francis and Schipper 1999). However, Ohlson (2001) argues that 'other information' is ignored in these studies and the valuation model could be improved by incorporating analyst earnings forecasts. This study uses the argumentation provided by Ohlson (2001) and examines whether the empirical version of the residual income model that uses earnings forecasts is a better model than the historical price model in seven Asian countries: Hong Kong, Malaysia, Singapore, Thailand, Indonesia, the Philippines and Korea, as well as in country groups and subgroups by their legal origins: the common-law group and the civil-law group (with subgroups of French origin and German origin). The results show that the adjusted R2 for the residual income model is higher than for the historical price model in some countries and country groups. The improvements are more significant in countries or country groups where public disclosure is more important to solve the information asymmetry problem between managers and investors.