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Deducted: firms having a negative book value during the time interval of research. (1)
Total sum of qualified firms selected 58
3.3. Representation of Research Models and Assumptions
This research has two main assumptions each having been tested within the framework of four models
and the obtained results are compared with each other. These assumptions are as follows:
A There is a significant relationship between abnormal earnings of each period and
abnormal earnings of prior period
Hereafter we will refer to this as the existing forecast relation (EFR) hypothesis. This assumption in second and fourth models (Ohlson and Feltham-Ohlson sign-oriented models, respectively), with considering the sign of abnormal earnings (according to Giner and Iniguez, 2006),and in first and third models (Ohlson and Feltham-Ohlson traditional models, respectively), without considering their sign and, also, as a regression relation were tested by the least squared errors method.
It is noteworthy that in all studied models the of other information variable was ignored due to non
access to required data, and, the non existence of the first order serial correlation in error factor was
also reviewed through the formation of a regression relation between error measures of each year with
the prior year.
To estimate abnormal earnings we first obtain the cost of capital (r) for each company based on the CAPM model.^ In consistency with the earnings figure, we measure the cost of capital after taxes: (1 ).[ ( ) ] j,t t t j,t t r = − tax rf + β Rmkt − rf where:
t tax : Effective rate of tax in year t1
t rf : Free of risk return rate in year t
j,t β : Systematic risk for firm j at time t
t (Rmkt − rf ) : Risk premium at time t
In model No. 1 of this research, the abnormal earnings are not segregated in terms of sign and are underestimated within the framework of below regression model.
, +1 11 , , +1 = + j t
a
j t
a
j t x ω x ε (10)
Where:
a
j t x , : abnormal earnings of firm j at time t
11 ω : Persistence of abnormal earnings
Giner and Iniguez (2006) state that non segregation of abnormal earnings in terms of sign lead to the utilization of negative abnormal earnings as the same as the positive ones in calculations. While the investors’ interpretation of negative abnormal earnings differs from the positive ones because of two following reasons:
1 It was computed each year as the Median of the ratio: ,tax profit/profit before taxes, for all firms in the sample.
65 International Research Journal of Finance and Economics - Issue 36 (2010)
1. Investors do not generally consider the negative abnormal earnings in their calculations because they hope to solve the current problems of firm and the future profitability in their calculations.
2. Loss making firms during winding-up are often valuated under liquidation option and,therefore, the least return of investment in firms’ share is fixed and the current losses have no effect thereon.
On the same basis, they present their model No. 2 (the second model of this research) as
follows:
, 1 11 , 11 , , +1
+
+ = + + j t
a
j t t
a
j t
a
j t x ω x ω D x ε (11)
Where:
a
j t x , : abnormal earnings of fir本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。