Fundamental Valuation of Extra-Financial Information

Abstract

In this study, we augment seminal models based on Ohlson (1995) by integrating the value impact of ratings related to three different extra-financial categories, i. e. corporate governance, human capital, and innovation capital. For a sample of large European public firms, we find that a model including human capital information and analysts' earnings forecasts best explains current stock prices. Our model based on human capital information (without analysts' forecasts) best identifies under- and overvalued companies and is thus useful for generating future positive hedge returns. This supports the findings of Dechow et al. (1999), who hold that models incorporating analysts' forecasts are superior in explaining contemporaneous market prices and models lacking this information exhibit the greatest predictive ability. We find that extra-financial information indeed conveys value relevant information beyond accounting figures and analysts' earnings forecasts.

Keywords: Capital markets, Extra-financial information, Information dynamics, Ohlson (1995) model, Valuation models

JEL Classification: J24, M41