Price And Return Models

Researchers in accounting must often choose between return models, in which returns are regressed on a scaled earnings variable, and price models, in which stock prices are regressed on earnings per share.Several papers discuss the conceptual advantages and disadvantages of price and return models. Gonedes and Dopuch (1974) argue that return models are theoretically superior to price models in the absence of well-developed theories of valuation. Lev and Ohlson (1982) describe the two approaches as complementary, whereas Landsman and Magliolo (1988) argue that price models dominate return models for certain applications. Christie (1987) concludes that while return and price models are economically equivalent, return models are econometrically less problematic. Despite the criticism, price models persist.In the paper《Price and return models》written by Kothari and Zimmerman in 1995, they provide a framework for choosing between these models. An economically intuitive rationale suggests that price models are better specified in that the estimated slope coefficients from price models, but not return models, are unbiased. Their empirical results confirm that price models'earnings response coefficients are less biased. However, return models have less serious econometric problems than price models. In some research context the combined use of both price and return models may be useful.In terms of the result and method of Kothari and Zimmerman, this paper uses the data from Chinese stock market to compare the differences between price and return models.