A Comparison of Explanatory Power between Residual Income Valuation and Abnormal Earnings Growth Models in Determining the Value of Companies



The aim of this study was to compare the explanatory power between two models of residual income valuation and abnormal earnings growth in determining the value of admitted companies in Tehran Security Exchange. According to the model of residual income valuation, the value of the company follows book value of equity and earnings by clean surplus accounting method and the value of the company follows abnormal earnings over time, based on abnormal income growth model. Abnormal earnings is exceed earnings of a company accounted according to imposed capital costs over time. Our study sample included 177 companies during 2002 to 2007. As the findings showed, none of the hypotheses verified significant difference between explanatory powers in two models. The findings also indicated that there was a significant relationship between the company value and accounting variables but there wasn't a significant difference between explanatory power in determining the company values. It was also revealed that explantory power of residual income valuation model was relatively higher than abnormal earnings growth model in all cases. However, it should be noted that there were two independent variables in residual income valuation model but one independent variable in abnormal earnings growth model.