The explanatory value of intrinsic equity valuation models for share price variations: A survey of recent approaches

Over the past six decades, a considerable amount of research has been conducted to better understand the explanatory ability of intrinsic equity valuation models to account for variations in equity share prices or returns, in which the accounting-based Ohlson residual income valuation framework has been the primary focus. Meanwhile, several variants of this model have emerged, the foremost of which typically comprises the decomposition of the Ohlson residual income variable into substitute accounting earnings variables, such as the traditional bottom-line earnings variable or, more recently, alternative earnings performance measures, of which earnings before interest, tax, depreciation and amortisation (EBITDA) is a particular case in point. However, there appears to be a lack of consensus about the variables of interest and the most appropriate model to define the predicted interconnections between accounting values and share prices or share price returns. In light of this lack of accord, the aim of this study was to examine the recent literature with regard to the approaches and evidence pertaining to the Ohlson model and the recent variants thereof that are based either on traditional or alternative earnings performance measures, with a view to answering the following research questions: 1. Which econometric model results in the best explanation of the association between accounting information and share prices? 2. Consequently, which variable, when combined with equity book values, seems to provide the most persuasive evidence of association with equity share prices: EBITDA, earnings or residual income? To answer these questions, a systematic literature review was conducted. The criteria were that the studies had to have at least two explanatory variables of interest in accounting for share price variations or returns, with one of them being equity book values and the other being any earnings performance measure, such as residual income, earnings, EBITDA, or combinations involving transformations of these. The review entailed a critical evaluation of the methodologies, model specification and model output against the reported findings, inferences and conclusions. The results revealed that the original Ohlson (1995) model, the Collins et al. (1997) and the recent EBITDA variations yielded equally valid demonstrations of the association of accounting information with share price variations. Consequently, depending on the choice of model, all three variables, EBITDA, earnings and residual income, appear to possess an equal amount of explanatory power to account for variations in equity share prices. The study’s major contribution is to clarify the explanatory power of Ohlson-based models and the specification of variables, as well as methodological and analysis issues that could inform future research in the field. Keywords: EBITDA; equity valuation; Ohlson (1995) residual income valuation framework; value relevance; alternative performance measures; fundamental valuation; intrinsic equity valuation. JEL classification codes: M41; G10, G12; G14; G11; G3

The value relevance of EBITDA and book values: Evidence from the Johannesburg Stock Exchange

Orientation: This paper stems from Ohlson’s valuation framework, where residual income as a variable was substituted by the non-Generally Accepted Accounting Practices (GAAP) measure of earnings before interest, taxes, depreciation and amortisation (EBITDA). Research purpose: The primary purpose was to determine whether EBITDA, together with the book value of equity (BV), could be shown to be value relevant by means of an intrinsic equity evaluation model. Secondary hereto was to focus on the value relevance of the residual between EBITDA and traditional bottom-line earnings, namely interest, taxes, depreciation and amortisation (ITDA). Motivation for the study: The concern is that the current evidence value relevance of EBITDA offered in the literature has been premised on relative valuation approaches, meaning they are primarily anecdotal. Research approach/design and method: Cross-sectional ordinary least square regression analyses were applied from the top 100 largest companies listed on the JSE, from 1995 to 2017. Main findings: The results demonstrated that EBITDA, ITDA and BV accounted for significant variations in equity share prices when controlling for the confounding effects of scale, growth and the incidence of reported accounting losses. Practical/managerial implications: Ultimately, these findings should be seen to confirm the validity of EBITDA as an alternative input to bottom-line earnings in the valuation of equity shares. Contribution/value add: The study extends the debate by providing an alternative perspective based upon Ohlson’s residual income valuation framework, in respect of which there has currently been a paucity of evidence

Modelling of crowd-induced vibrations in stadium terraces

Human-induced vibrations are increasingly becoming an issue of great concern in the design of civil engineering structures. In this research work, three major trends that contribute to the prevalence of human-induced vibrations in public structures were identified. While the focus has been mainly on sports stadia, the known effects of humans on the vibration behaviour of structures in general were also reviewed. Existing design and theoretical models for predicting the effects of humans on structures were examined with two issues being raised. Firstly, the existing force model for describing load impulses resulting from jumping has been found to be unable to predict the correct shape of the impulse or its dominant harmonic for jumping frequencies that are significantly less than 2 Hz. Secondly, there is experimental evidence to show that active humans not only excite a structure through footfall-induced forces, but that they also affect the dynamic properties of the structural system, namely its natural frequencies and damping. However, the existing modelling approach assumes that humans engaged in continuous movement can act only as an input force in the dynamics of the vibrating system. To address both these issues, a new modelling approach, termed 'the pseudo-variable mass model' has been proposed in this study. This method is based on the treatment of the structure-jumper system as a pseudo-variable mass system. The predictions of both the existing and the proposed models were compared with the actual results of experimental investigations involving 10 jumpers, jumping on a lightweight-flexible structure at frequencies of 1 Hz and 1.5 Hz. Comparisons with other findings in the literature were also made. This study showed that the proposed model can adequately predict four observed phenomena, namely, the impulse shape, the dominant harmonic of the impulse, the dominant harmonic in the acceleration response and the effect on the fundamental frequency. Thus, for safe and economic design of lightweight and flexible structures, the proposed model may be used to simulate the effects of jumping at frequencies that are significantly less than 2 Hz