Firms Life Cycle and Ohlson Valuation Model: Evidence from Iran

Abstract

Ohlson prediction and valuation models Ohlson (1995) are based on firm book value, accounting profit and the assumption of "randomized, balanced and stabilized abnormal earnings". On the other hand, the significance of risk and performance indicators during the firm’s life cycle is different according to the life cycle theory. This literature represents the linkage of these indicators with the firm’s value in different life cycle stages. In this study which is aimed to review the ability to improve the Ohlson valuation model considering the firm’s life cycle variable, a sample of 110 firms listed in Tehran Stock Exchange between 2003 and 2013 was selected. Using Anthony and Ramesh (1992) variables and Park and Chen (2006) methodology, the life cycle was divided into three stages and then, considering the firm’s place in the life cycle, prediction models of abnormal earnings and Ohlson firm’s valuation Ohlson (1995) were adjusted and afterward the adjusted models were compared with the initial model in two short-term and long-term estimation periods of 5 and 10 years, respectively. The results show that during both estimation periods, the adjusted model has a better performance in predicting abnormal earnings and firm’s valuation compared to the initial model. During the 10-year estimation period, the two models’ estimated values were significantly less than actual values. The probable reason for this difference is the sharp rise in the value of stocks during the final years of the period especially between 2012 and 2013.