Faculty Scholarship 1994 - Present

Time Series Model Complexity and Firm Valuation: The Case of AR1 Firms versus Non-AR1 Firms

This study examines the effect of the complexity of quarterly earnings generating time series models on firm valuation. The examination is limited to the comparison between AR1 firms and non-AR1 firms, and the evaluations are based on the levels approach. Results consistently show that the association between quarterly stock prices and quarterly earnings is higher form AR1 firms than that for non-AR1 firms. The effect of firm size is also investigated. Although small firms have a higher association than larger firms, the conclusion from not considering the size effect is unchanged. Thus, knowledge of model complexity is useful for firm valuation.