The dynamic effects of shocks in a clean surplus model

Abstract

The paper derives some implications for the price-book value model of Ohlson [1995] and Feltham and Ohlson [1995] when earnings and dividends are subject to shocks (random disturbances). The paper’s main conclusion is that a one-time autoregressive earnings shock has a permanent effect on earnings, book value and dividends. Under a particular parameterization, a positive earnings shock increases book value only to the extent that its effect on productivity is transitory.