Analysis of financial leverage impact on the quality of Ohlson model valuation: Empirical evidence from Russia

Abstract

Research described in this paper addresses the problem of absence of an adequate and not complicated in terms of calculations model which could explain accounting information impact on market valuation of the company. The article of Bukhvalov and Volkov (2005) is devoted to solution of this problem by application of the Ohlson model. This research had several limitations, one of which was neglecting of financial leverage. Thus, the main goal of this research is to find the impact of financial leverage on the quality of Ohlson model valuation for Russian companies. In order to achieve the goal several tasks were necessary to complete: • Determine the most appropriate model for analysis; • Test whether the original and modified with financial leverage models are applicable for Russian public companies valuation after crisis; • Define whether capital structure policy for Russian companies can be elaborated from the modified model. The main result of this research is confirmation of financial leverage impact on the market value of the company. The modified model showed higher explanatory and forecasting power than a basic one. It was also found that the debt funds have different values in different industries, so the analysis of specific sectors helps to get more accurate results than the analysis of the entire Russian market. Finally, it was shown that the companies are able to increase their value by forming capital structure close to the industrial average.