Explanatory Power of Fama and French Three-Factor Model vs Capital Asset Pricing Model Focusing on Firms' Life Cycle

This study deals with the life cycle of firms as one of the explaining factors of return. The statistical population consists of firms listed in Tehran Stock Exchange over the period from 2003 to 2017. To evaluate the effect of the life cycle, firms are classified based on accounting information (sales growth, capital expenditures) and life (growth firms, mature firms and stagnant firms). The capital asset pricing model (CAPM) and Fama and French three factor model (3FF) are evaluated in each class and also for all firms . Vuong test results reject any difference between information content of capital assets pricing model (CAPM) and Fama and French three-factor model (3FF). Adjusted coefficient of determination in both models is the highest in mature firms and the lowest in stagnant firms. Also Cramer Z test indicates that firms' life cycle is effective on the explanatory power of models in the study