The Effect of Net Financial Expenses on the Company’s Value Using Residual Income Model in the Capital Market

Subject Areas : Journal of Investment Knowledge

Mohammadhossein Setayesh ¹ , Mohammad Kiamehr ² , Gholamreza Hajizadeh ³

1 - Associate Professor of Accounting, University of Shiraz , Siraz, Iran (Corresponding Author)
2 - Accounting PhD student at Shiraz University, Siraz, Iran
3 - Instructor School of Management, Economics and Accounting PNU

Received: 2016-10-27 Accepted : 2017-01-12 Published : 2017-07-23

Keywords: Net financial expense, Residual earning, Operating income, Fair value accounting,

Abstract :

This study is conducted to examine the relationship between the financial expenses and the companies’ value in Tehran Stock Exchange (TSE). For this purpose, net profit in residual income model is divided into two groups including operating profit and net financial expenses. The data collected from 122 companies listed in TSE was examined using multivariate regression model. The results of the study indicated a significant relationship between the stock price of the companies listed in TSE and earnings per share, book value per share and operating profit per share. However, no significant relationship was found between the stock price and the net financial expenses. Considering the lack of relationship between the stock price and the financial expenses, it is suggested to use residual operating profit model instead of residual income model in evaluating the companies.  Furthermore, with regard to the fact that most of the financial items are reported in balance sheet with their fair value, it can be said that the results of this investigation is fully consistent with Penman’s idea that “the items which are reported with the fair value in the balance sheet will be irrelevant in the companies’ evaluation.

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