Evaluation of the role of firm’s life cycle in the optimal design of Ohlson valuation model

Document Type : Original Article

Authors
Hosein Etemadi
Forough Rahimi Mougouie
Mohammad Ali Aghaie
Ali Asghar Anvary Rostamy
Abstract
The significance of risk and performance indicators during the firm’s life cycle is different according to the life cycle theory. On the other hand Ohlson prediction and valuation models (1995) are based on firm book value, accounting profit and the assumption of "randomized, balanced and stabilized abnormal earnings". 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 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 (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, however during the 10-year estimation period, the two models’ estimated values were significantly less than actual values.
Keywords
Unusual gains
Evaluation
company life cycle
the Olson model