Evaluation of Jointly Use Effect of Relative Valuation Variables for Residual Income Trend

Researchers mostly categorize firms into two groups- growth firms and value firms-based on using either P/B or P/E ratios separately, as valuation variables to study on forecast power and ability of the Residual Income. In Iran, similarly, investors and researchers use P/E and sometimes P/B ratios, as measures of stock valuation and pricing. This study investigates on Residual Income trend of the categorized firms by using P/E and P/B ratios jointly. Therefore, research hypotheses have been formulated as: declining firms expectedly decrease their future Residual Income and turnaround firms, mature firms; growth firms expectedly increase their future Residual Income. Competitive firms expectedly do not change their Residual Income also. By applying the correlation test to all firms, which have been listed in Tehran Stock Exchange during years of 2000 to 2005, the firms were founded out to be in confidence level as a result. Then correlations of P/E and P/B ratios with the other variables including Residual Income, changes and growth of the Residual Income and ROE as well were tested that the result have indicated that the applied Correlation Coefficient to the categorized groups is more identified and be stronger compared to pool data application. I observed that the relation between P/B and variables is more constant and stable rather than to P/E ratio, suggesting the importance of categorizing firms facing to similar economic situations to expand the area of investigations on Residual Income trend and be helpful for future researches.