Machine summary:
"Our results indicate that first, accounting book value and residual income are positively and significantly related to current stock prices in Tehran Stock Exchange.
3. RESEARCH DESIGN Our analysis is based on contemporaneous cross-sectional regressions of accounting book values of equity and residual earnings on stock prices(dependent variable).
We analyze both the relative and the incremental explanatory power of book value of equity and residual earnings using an approach applied previously in accounting by Graham and King(2000).
For residual earnings estimated to terminate at time T, Graham and King(2000)use the following model: >CS< Where PRlCEit is the price per share of firm i at the end of period t, BVit is the book value of equity per share of firm i at the end of period t, and REit is the residual earnings per share of firm i for year t + k.
We use T 1 to test residual income model, because firms' forecasts used to predict future residual earnings were only available for 1 year, Our first tests are concerned with the incremental explanatory power of book value of equity and residual earnings.
The results indicate that accounting book values and residual earnings are positively and significantly related to current stock prices.
In addition, the results indicate that book value of equity and residual earnings are positively and significantly related to current stock prices in Tehran Stock Exchange.
We find that RE have less explanatory power than BV, Also, we find that accounting book value of equity and residual earnings are positively and significantly related to current stock prices in Tehran Stock Exchange(TSE), Keywords: Residual Earnings Model, Valuation."