A Lintnerian Linear Accounting Valuation Model

This paper develops and tests a linear valuation accounting model based on Lintner’s (1956) dividend model. Two test methodologies are employed on a firm-level time-series basis. First, abstracting from the nonlinear relationships among the parameters, the information dynamic and valuation equation are estimated by linear OLS and linear SUR. The estimated equations are evaluated by reference to the sign and value predictions of the model. Second, recognizing the underlying nonlinear relationships among the parameters, the Lintnerian system of equations is estimated by nonlinear OLS and nonlinear SUR. All parameters are estimated endogenously at the firm level, including each firm’s cost of capital. The resulting parameter estimates are evaluated for statistical and, in the case of costs of capital, for economic significance. Results of the first (linear) methodology by and large confirm the validity of the Lintner model. The signs and values of the estimated coefficients are consistent with the predictions of the Lintner model except that the (mean) estimated book value coefficient in the price equation exceeds its theoretical upper bound. The results of the second (nonlinear) methodology are somewhat more problematic. Although the Lintner model yields statistically significant firm-level costs of capital, these estimates are not economically significant for the sample period.