Transformations  in
Business & Economics

FIRM VALUATION BASED ON AN IMPROVED OHLSON MODEL
Xiaosong Zheng, Yupei Zhai, Ziqi Wang, Jie Song, Sijian Wu

ABSTRACT. In this research, the Ohlson model based on the traditional DuPont analysis system is first discussed. Then an improved Ohlson model is presented which decomposes the source of residual income. Both models are used to evaluate the firm value of Dahua Technology to compare the results for the accuracy and reliability of the models. The time series smoothing index method is adopted to improve the objectivity and accuracy of the predicted results. The final results show that the improved Ohlson model, which decomposes residual income, has a higher valuation accuracy than the traditional model based on the DuPont system. Moreover, according to the improved Ohlson model, since only operating assets can create residual value, firms should focus on creating value through operating activities, management capability, and employee engagement. In addition, the improved Ohlson model can help investors focus on the analysis of a firm's business activities and avoid being misled by results from financial activities.

KEYWORDS:  Ohlson model, firm valuation, residual income, DuPont, Dahua.

JEL classification:  G32, M41.