Evaluation of the Role of Firm's Life Cycle in the Optimal Design of Valuation Pattern Based on Abnormal Earnings

Ohlson Model (1995) and Feltham-Ohlson Model (1995) are valuation models based on abnormal earnings that are based on firm book value، accounting profit and the assumption of «randomized and stabilized abnormal earnings». The significance and stability of risk and performance indicators during the firm’s life cycle is different according to the life cycle theory and researches. This study review the ability to improve the Valuation models based on abnormal earnings considering the firm’s life cycle variable in firms listed in Tehran Stock Exchange. So a sample of 110 between 2003 and 2013 was selected. Using Anthony and Ramesh model (1992) and Park and Chen methodology (2006)، the life cycle was divided into three stages. Abnormal earnings and firm’s valuation first time are computed by Ohlson Model (1995) and Feltham-Ohlson Model (1995) in two short-term and long-term estimation periods of 5 and 10 years. Third time abnormal earnings and firm’s value are computed results with the initial model. 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.