riish Journal of conomics, Financ and Managmn Scincs 64 Ocobr 2011, ol. 2 (1 An mpirical valuaion of Using h Rsidual Incom Modl for rdicion of Sock ric Mhdi Sarikhani Dparmn of Accouning, Safashahr ranch, Islamic Azad Univrsiy, Safashahr, Iran Fahim brahimi Dparmn of Accouning, Safashahr ranch, Islamic Azad Univrsiy, Safashahr, Iran Absrac Th us of fundamnal analysis can b rgardd as on of h ffciv ools o prdic changs in sock prics. Th rsidual incom modl is considrd among h ffciv modls for fundamnal analysis. Th purpos of his sudy is o prdic sock prics by such a modl. Thrfor a sampl of 87 companis lisd on h Thran Sock xchang was slcd, and h rsuls of his sudy indica h ponial of his modl. Thy showd a significan rlaionship bwn h currn sock pric and calculad pric by us of a rsidual incom modl and h book valu of sock. Furhrmor, i can b concludd ha in prdicing sock prics, h raio of h pric calculad by h rsidual incom modl o h currn sock pric is mor appropria, in comparison o h raio of h book valu o h currn pric of sock. Kywords: Rsidual incom modl, Inrinsic alu, ook valu, Fundamnal Analysis. Inroducion Rgarding h valuaion of sock prics for invsmn and h prdicion of fuur prics, diffrn modls and mhods hav com ino vogu. Alhough hr will sill b rrors in prdicion, his mhod will b mor usful han slcing h sock wihou any knowldg. y aking all hs problms ino accoun, invsors and analyzrs hav implmnd chnical and fundamnal analysis o valua sock valus and invsmns. Tchnical analyss ar basd on h sudy of sock pric rnds or, in ohr rms, prdicion of sock pric bhaviors basd on pas bhaviors. On h ohr hand, in fundamnal analyss invsors and analyzrs ar inrsd in calculaing h inhrn valus of socks. Thrfor h diffrnc bwn h inhrn valus of sock and h currn prics of sock can play a vry significan rol in improving invsor moivaions o undrak invsmns. Furhr, fundamnal analyss xamin h basic financial informaion of a company o prdic profi, dmand, supply, managmn capabiliis, and ohr inhrn issus ha can affc mark valu and is growh ponial. In fundamnal analysis, invsors connd ha h fundamnals, including h financial samns of a company, h inrim financial rpors, h hisorical financial rnds, and any ohr kinds of forcas concrning such hings as fuur growh, sal, and profi, should b abl o rgulariz h procss of slcing sock and is iming of sals (Thoms, 1999. Sockholdrs and crdiors valua h valu of a company according o h profis ha i acquirs. In an fficin mark, h prsn valu is acquird by h xpcd fuur cash flow ha has bn discound o h xpcd ra of rurn wih rgard o is risk. Th currn prformanc of a company is summarizd in is financial samns. Howvr, w ar unabl o prdic is cash flow and h mark valu by making us of hs pics of informaion. Alhough according o h concpual framwork of financial accouning, financial samns should hlp invsors and crdiors in assssing h prics, h iming, and h uncrainy of fuur cash flow (SFAC NO. 1; 1987. As a rsul, a clos rlaionship xiss bwn h currn financial prformanc of a company, fuur cash flow, and bwn financial prformanc and sock 2011 riish Journals ISSN 2048-125X
riish Journal of conomics, Financ and Managmn Scincs 65 Ocobr 2011, ol. 2 (1 pric and h changs in sock pric. Th main purpos of rsarching capial marks is o provid vidnc for confirming h xisnc of hs rlaionships (Kohari, 2001. According o Nvu (1985, fundamnal analyss ar considrd as on of h daa analysis mhods for prdicing sock prics. Kohari (2001 xprsss wo principal rols as far as fundamnal analyss ar concrnd. Firs, h main rason bhind doing rsarch on fundamnal analyss and is applicaion is drmining h mispricing of scuriis for invsmn. Scond, hy ar usd o drmin h inhrn valu of socks. On h ohr hand, h xisnc of an fficin mark plays a vry significan rol in fundamnal analyss. Rgarding h rlaionship bwn h inhrn valu and sock pric, a lo of rsarch has bn don by diffrn scholars. Th bs answr o h qusion of whhr h rsarchs don wih rspc o fundamnal analyss can rsul in discussing som pars of h accouning rsarchs is ha h availabl informaion in financial samns and h capial mark should firs b compard. Doing mark rsarch on fundamnal analyss has rcnly bn gnralizd bcaus hr is som srong vidnc abou financ liraur whil i canno b rgardd as ru for fficin mark hypohsis (Kohari, 2001. Among mhods usd for fundamnal analyss ha w can rfr o is h rsidual incom modl, which prdics a sock pric basd on rsidual incom. Th purpos of his sudy is o assss h abiliy lvl of his modl in prdicing sock prics. Rsidual Incom Modl In fundamnal analysis, financial samns ar rgardd as h criria for valuaion. In ohr words, h valuaion of financial samns is h saring poin.. Invsors sar h procss of valuaion basd on h valus ha hav bn dfind in h balanc sh, and hy will hn follow a procss o rcogniz addiional valu on book valu. ric = book valu + addiional pric To masur h addiional amoun, w can mak us of rsidual incom. Th rsidual incom is dfind basd on diffrnc of h profi of h rlad priod and h minimum of xpcd rurn. Th modl ha can b usd o masur h addiional valu of prdicing h rsidual incom is calld h Rsidual Incom Modl, and h basis for i is Clan Surplus Rlaionship (Ohlson, 1995; Flham and Ohlson, 1995. According o Absolu Surplus Rlaion, a chang in book valu of h ownrs quiy quals profis of h priod minus h dividnd. In ohr words, h following calculaion will b don: y y d x Thrfor, w can dfin Rsidual Incom Modl as follows: 1 1 (1 k (1 k 2 2 (1 k 3 3... In h abov formula, is h rsidual incom of ownrs quiy. arn k 1 * 1 In his formula, 1 is h book valu of h availabl sock in -1 and k is h xpcd rurn. 2011 riish Journals ISSN 2048-125X
riish Journal of conomics, Financ and Managmn Scincs 66 Ocobr 2011, ol. 2 (1 Th companis ar usually xchangd by pric, which is qui diffrn from book valu. Th main rason for his problm is ha som pars of asss and liabiliis ar rcordd according o h mark pric, som basd on h cos valu in h balanc sh, and lasly, som ar no rcordd in h balanc sh. Accordingly, h analyss pay no anion o h balanc sh in hir analysis. Thy obsrv h book valu of a sock, and hn hy wan o find ou h amoun of valu ha mus b addd o h book valu unil h ral valu is discovrd (nman, 2004. As a rsul, h ownrs quiy will b obaind by adding h xpcd rsidual fuur incom and h book valu of h xpcd rsidual incom. This amoun quals h missing valu on h balanc sh. According o asnll (1982, his amoun is considrd as h company s goodwill. asnll also connds ha h goodwill quals h currn valu of h xpcd rsidual incom in Clan Surplus Rlaionship condiions. If w xprss h firs formula according o financial raio (, w will hav h following calculaions: 1 Thn, 1 1 ( RO (1 k 1 k * I mans ha if w xpc ha h arnings of sockholdrs ar mor han h book valu amoun of h ownrs quiy (h posiiv rsidual incom, h quiy should includ mor valu han book valu, should b changd o a highr amoun, and if h RO is lss han h xpcd rurn, i mans ha h sock should b sold for a pric lss han is book valu. RO arn 1 rvious Rsarch Dchow al. (1999 provid an mpirical assssmn of h rsidual incom valuaion modl proposd in Ohlson (1995. Thy poin ou ha xising mpirical rsarch rlying on Ohlson s modl is similar o pas rsarch rlying xplicily on h dividnd-discouning modl. Thy sablish ha h ky original mpirical implicaions of Ohlson s modl sm from h informaion dynamics ha link currn informaion o fuur rsidual incom. Thir mpirical rsuls gnrally suppor Ohlson s informaion dynamics. Higgins (2011 dmonsrad a mhod o forcas sock prics ha uss analys arnings forcass as ssnial signals of company valuaion. I is basd on h rsidual incom modl, wih adjusmn for auocorrlaion. Ovrall, his papr providd a mhod o forcas sock prics ha blnds fundamnal daa wih mchanical analyss of pas im sris. nman (2001 dmonsrad, wih xampls, ha h claim ha cash flow and accrual accouning mhods for valuing quiis mus always yild quivaln valuaions is misguidd. H concludd ha pracic inviably involvs forcasing ovr fini runcad horizons, and h accouning spcifid in a modl cash vrsus accrual accouning in paricular is prinn o valuaion wih fini-horizon forcasing. H 2011 riish Journals ISSN 2048-125X
riish Journal of conomics, Financ and Managmn Scincs 67 Ocobr 2011, ol. 2 (1 found ha h issu of choosing a valuaion modl is an issu of spcifying pro forma accouning, and so for fini-horizon forcass, w canno b indiffrn o h accouning. lnborg (2002 compars h discound cash-flow approach and h rsidual incom modl. Th wo valuaion approachs ar compard on h basis of analyical aracivnss. This sudy dmonsras ha if praciionrs inroduc simplifying assumpions in hir valuaion of a company, hy also inroduc biass in hir is valu simas. Somims h rsidual incom approach yilds mor accura company valu simas, hough in ohrs h discound cash-flow approach yilds mor accura simas. Furhr, h impac of simplifying assumpions on a company s valu simas can b significan. Xiaoquan (2002 sd h mpirical validiy of h accouning-basd rsidual incom modl and compard h prformanc of his modl wih h convnional dividnd discoun modl. H sd wo implicaions of h wo: volailiy of prics rlaiv o fundamnals basd on h Ws inqualiy ss and hir dynamic implicaions by cross-quaion rsricions basd on h Campbll-Shillr AR s. Th rsidual incom modl is found no o b rjcd by ihr s using ihr h S& indx or h DJIA indx. Nihr is i rjcd by ihr s a mos individual companis lisd on h Dow Jons Indusrial Avrag. Rsarch Hypohss Th main hypohsis: Th sock pric can b prdicd by h rsidual incom modl. Th scondary hypohsis: 1. If h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is mor han 1, h sock pric will incras in h fuur. 2. Thr is a significan rlaionship bwn h calculad pric by h rsidual incom modl and h currn sock pric. 3. Thr is a significan rlaionship bwn h book sock valu and h currn sock pric. 4. To prdic h sock pric, h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is mor appropria, in comparison o h proporion of h book sock valu dividd by h currn sock pric. ariabls Th following variabls hav bn usd for h purpos of his sudy: 1. Th currn sock pric (. 2. Th book valu of sock (, which is obaind by h sum of h ownrs quiy dividd by h numbr of socks. 3. Th calculad inhrn valu in h rsidual incom modl: To calcula his variabl, h hr yars rlad daa hav bn usd according o Frankl and L (1998: ( RO K (1 K ( RO K ( RO K 1 2 * * 1 2 1 * 1 (1 K (1 K According o his modl, w can uiliz h prdicd or ral daa. Howvr, h ral daa hav bn usd in his rsarch. 2 2011 riish Journals ISSN 2048-125X
riish Journal of conomics, Financ and Managmn Scincs 68 Ocobr 2011, ol. 2 (1 Sampl Our sampl compriss daa from 87 nonfinancial companis lisd on h Thran Sock xchang for h yars 1999 hrough 2005.Th companis mus m spcific criria o b includd in h sampl: 1. Thy mus clos hir fiscal yar in mid-march (nd of rsian calndar. 2. Th balanc of ownrs quiy in hs companis should b posiiv. 3. Thy mus hav full financial daa for h whol priod of invsigaion. Sourc of Daa Th rquird daa for xaminaion wr xracd from h informaion of mark and financial samns. For his purpos, a larg scion of h informaion was xracd from Tadbir ardaz and RahAvard Novin sofwar (wo Iranian sofwar producs, and h rs of h informaion was xracd hrough h informaion daabas of h Islamic Sudis and Rsarch Managmn Cnr of h Thran Sock xchang. Hypohsis analysis In his rsarch, hr is on main hypohsis followd by four scondary hypohss. Th firs scondary hypohsis sing: Hypohsis 1: If h proporion of h pric calculad by h rsidual incom modl dividd by h currn sock pric is mor han 1, h sock pric will incras in h fuur. A proporion s is usd o sudy his hypohsis. To do his, w divid h companis ino wo groups. In group on, w slc hos in which h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is mor han on. In group wo, w choos hos companis in which h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is lss han on. In h cas ha h proporion of h pric calculad by h rsidual incom modl dividd by h currn sock pric is mor han 1, w considr p as h proporion of hos companis having an incras in sock pric in h following yar. Howvr, if his proporion is mor han half (50%, h firs hypohsis is confirmd. Tabl 1 indicas h obaind rsuls of his hypohsis. Whn h abov rsuls ar considrd, h firs hypohsis (whn h proporion of / is mor han on, hr will b an incras in h sock pric was confirmd a 0.05 lvl of significanc. Tabl 1. h rsuls of hypohsis 1 sing Succss roporion 69.6% Z 3.53 -valu 0.00 Th scond scondary hypohsis sing To s h scond hypohsis (hr is a significan rlaionship bwn h calculad pric by rsidual incom modl and h currn sock pric, h -s was implmnd. 2011 riish Journals ISSN 2048-125X
riish Journal of conomics, Financ and Managmn Scincs 69 Ocobr 2011, ol. 2 (1 Tabl 2 shows h rsuls obaind from his hypohsis. Rgarding h abov rsuls, w can conclud ha hr was significan rlaionship bwn h calculad pric by rsidual incom modl and h currn sock pric. Thrfor h scond hypohsis is confirmd. Tabl 2. h rsuls of hypohsis 2 sing Man Sandard Dviaion 7510 10122 52177 13130 T -1.01 Df 488 -valu 0.312 Th hird scondary hypohsis sing Taking h hird hypohsis ino accoun (hr is a significan rlaionship bwn book sock valu and currn sock valu, w found a significan rlaionship bwn book sock valu and currn sock valu bcaus i is clar from Tabl 3. Thrfor h book sock valu xplains h currn sock valu. Tabl 3. h rsuls of hypohsis 3 sing Man Sandard Dviaion 10122 2840 13130 6259 T -.44 Df 621 -valu 0.174 Th fourh scondary hypohsis sing To prdic h sock pric, w find ha h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is mor appropria in comparison o h proporion of h book sock valu dividd by h currn sock pric. Thrfor, concrning h fourh hypohsis w found ha h rsuls of daa analysis in Tabl 4 indicad ha his hypohsis is also accpd bcaus h obaind valu was found o b insignifican a.05 lvl. Tabl 4. h rsuls of hypohsis 4 sing Man Sandard Dviaion - - - - -2612-7281 53836 14299 T 1.75 Df 494 -valu 0.041 Conclusion Th main purpos of his rsarch was o sudy h amoun of usfulnss of h rsidual incom modl in prdicing prics. To kp his purpos in mind, four scondary hypohss wr suggsd. Th rsuls obaind from scondary hypohsis 1 indicad ha if h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is mor han 1, h sock pric will incras in h fuur. According o h availabl financial liraur, h prdicd pric is mor han is ral pric whn his proporion is mor han on. Consqunly, sock cusomrs ar fascinad o buy his sock, lading o an incras in dmand for i, which ulimaly rsuls in an incras in is pric. 2011 riish Journals ISSN 2048-125X
riish Journal of conomics, Financ and Managmn Scincs 70 Ocobr 2011, ol. 2 (1 Th obaind rsuls of h scondary hypohsis 2 provd ha hr is a significan rlaionship bwn h calculad pric by h rsidual incom modl and h currn sock pric. Taking h rsuls of h hird scondary hypohsis ino accoun, w larnd ha hr is a significan rlaionship bwn h book sock valu and h currn sock valu. Lasly, as h rsuls of scondary hypohsis 4 indica, h proporion of h calculad pric by h rsidual incom modl dividd by h currn sock pric is mor appropria han h proporion of h book sock valu dividd by h currn sock pric. Considring h rsuls of all hs scondary hypohss, w find ha w ar abl o prdic h sock pric by making us of h rsidual incom modl. Aloghr, h main rsarch hypohsis is accpd. Rfrncs Dchow,., Huon, A., Sloan, R., 1999, An mpirical assssmn of h rsidual incom valuaion modl, Journal of Accouning and conomics 26, pp. 1 34. Flham, G., and Ohlson, J. 1995, aluaion and clan surplus accouning for opraing and financial aciviis, Conmporary Accouning Rsarch 11: pp. 689 731. Frankl, R., and L, C.M. 1998, Accouning valuaion, mark xpcaion, and cross-scional sock rurns, Journal of Accouning and conomics 25: pp. 283-319. Higgins, H. (2011. Forcasing sock pric wih h rsidual incom modl, Rv Quan Finan Acc (2011 36:583 604. Kohari, S.. 2001, Capial marks rsarch in accouning, Journal of Accouning and conomics 31: pp 105-232. Nvu, R. (1985. Fundamnals of Managrial Financ, Thomson Souh-Wsrn ublishing. Ohlson, J. 1995, arnings, book valus, and dividnds in quiy valuaion, Conmporary Accouning Rsarch 11: pp. 661 687. asnll, K.. (1982. Som Formal Conncion bwn conomic alus and Yils and Accouning Numbrs, Journal of usinss, Financ & Accouning, ol. 9, Issu 3, pp. 361-381. nman, S. (2001. On Comparing Cash Flow and Accrual Accouning Modls for Us in quiy aluaion: A Rspons o Lundholm and O Kf (CAR, Summr 2001, Conmporary Accouning Rsarch, ol. 18, No.4, pp. 681 692. lnborg, T. (2002. Firm valuaion: comparing h rsidual incom and discound cash flow approachs, Scandinavian Journal of Managmn, pp. 303 318. Thoms, M. C. (1999. Masring chnical analysis. Chicago: Darborn Financial ublishing. Xiaoquan, J. (2002. An mpirical s of h accouning-basd rsidual incom modl and h radiional dividnd discoun modl, Docoral Dissraion Univrsiy of Houson. 2011 riish Journals ISSN 2048-125X