Development of the Ohlson (1995) Prediction An Valuation Models with the Consideration of Bankruptcy Risk

Accounting earnings and the continuous operation assumption are two principles of Ohlson’s (1995) prediction and valuation models. Regarding the influence of bankruptcy risk on these two factors, in this research, these models are adjusted by the inclusion of bankruptcy risk. As a result, the primary models are compared with adjusted models during a 5-year (from 2003 to 2008) and a 10-year period (from 2003 to 2013) using panel data of companies listed in the Tehran Stock Exchange. The results indicate that the inclusion of the bankruptcy risk improves Ohlson’s prediction and valuation models during both 5 and 10 years estimated periods. However, due to the uncontrolled growth of prices in 2012 and 2013, which resulted in the price bubble formation, the estimated values by both original and adjusted models during 10 years estimated period are significantly lower than the actual market values.