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Equity Valuation Using Multiples
Abstract
We examine the valuation performance of a comprehensive list of value drivers and find that multiples derived from forward earnings explain stock prices remarkably well: pricing errors are within 15 percent of stock prices for about half our sample. In terms of relative performance, the following general rankings are observed consistently each year: forward earnings measures are followed by historical earnings measures, cash flow measures and book value of equity are tied for third, and sales performs the worst. Curiously, performance declines when we consider more complex measures of intrinsic value based on short-cut residual income models. Contrary to the popular view that different industries have different “best” multiples, these overall rankings are observed consistently for almost all industries examined. Since we require analysts’ earnings and growth forecasts and positive values for all measures, our results may not be representative of the many firm-years excluded from our sample.
... While some studies similarly conclude earnings multiples to generate superior prediction accuracy [e. g. [11][12][13][14][15][16], other studies conclude asset multiples to generate more accurate and less biased estimates [1,2,17]. Furthermore, sales are found to be more value relevant than reported negative earnings in the valuation of high-tech loss firms [18]. ...
... On a sectoral basis, results of prior research are consistent in that different multiples are most accurate across industry sectors (for the U. S. market [13,15,19], for the European market [5,20] and, for emerging markets [3,4,21]), but with varying relative superiorities that may be again attributed to peer pool sampling. ...
... Despite the superiority of forward trading multiples [1,5,7,8,10,11,13,15,[53][54][55][56], since this study emphasizes on transaction multiples employing data from the market for corporate takeovers of private firms, I employ trailing multiples for at least three reasons: First, forecast value drivers are often simply not available for private firms as they are for public companies. Second, even if forecast value drivers are available, they often lack reliability or cannot be verified in a reliable manner, respectively. ...
... Kim and Ritter (1999) examine the precision of comparable firm multiples for a sample of IPOs and provide evidence that forward-looking performance measures are better value drivers than historical measures. Liu et al. (2002) compare the efficacy of different multiples. They show that multiples built with forward earnings explain market value better than do other multiples, such as Content courtesy of Springer Nature, terms of use apply. ...
... The simplicity of (3) and (4) compared to (2) matches the superior informative power and accuracy of the EBITDA multiple and-with the best degree of precision-of the earnings multiple, as repeatedly documented by empirical studies (Chullen et al., 2015;Liu et al., 2002). ...
... For each multiple, we determine three sets of predicted prices based on three different definitions of the set of comparables. The most accurate multiple will be the one with the lowest dispersion of pricing errors in terms of the interquartile range (Liu et al., 2002). Following Liu et al. (2002) and Bhojraj and Lee (2002), we calculate pricing errors as percentage errors as follows: ...
In this study, we aim to address a serious gap in the otherwise rich value relevance literature around professional services firms. Such firms are generally recognised as making up a significant and distinct category within the contemporary economy. However, there is currently a notable absence in the value relevance studies on transactions around equity stakes for this sector. We address this issue and investigate the prediction accuracy of the sales multiple—commonly used as a valuation shortcut in the industry—and the value relevance of financial and non-financial information. We do so within the country-specific setting of private equity deals executed in Italy from 2012 to 2018 regarding small accounting practices (SAPs), which we deem of interest because they present similar characteristics to their European peers and because accounting firms are qualified in the management literature as 'classic' professional service providers. This exploratory study of 76 deals confirms the superior informative value and prediction accuracy of the sales multiple. We also ran a regression of transaction prices on several value drivers, identified consistently with prior studies and mainstream valuation theory. We thus found that some non-financial information specific to the context of SAP and certain deal characteristics are value relevant and complement financial information. An example of this is a firm's location in a small town. However, contrary to expectations, the age of a firm's owner was not found to be significant.
... First, because price reflects expectations about earnings over many future years, earnings sustainability is a key factor in valuation (see Chapter 6). In price multiple valuation, equity value is typically estimated by applying a multiple to an earnings construct (e.g., EPS, EBITDA); high earnings sustainability implies that price-multiple valuation is likely to yield precise value estimates because current earnings are a good proxy for future earnings (e.g., Liu et al. 2002Liu et al. , 2007Nissim 2019a). In fundamental valuation, one predicts long-term margins to convert sales forecasts into profit estimates; high earnings sustainability makes the current margin a good proxy for future margins. ...
... In price multiple valuation, equity value is typically estimated by applying a multiple to an earnings construct (e.g., EPS, EBITDA). Thus, high earnings sustainability (i.e., current earnings are a good proxy for future earnings) implies that price multiple valuation is likely to yield precise value estimates (e.g., Liu et al. 2002Liu et al. , 2007Nissim 2019a). This section provides a review of relative valuation (Subsection 6.1.1), ...
... Most industry classifications have several levels-for example, sector, industry group, industry, subindustry-which level should be used? Research suggests that in most cases the "industry" levels are the optimal choices (e.g., Alford 1992, Bhojraj et al., 2003, Liu et al., 2002, but this evidence is based on large sample, non-contextual analysis. For example, the insurance industry includes both life insurance companies and property and casualty insurers. ...
Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3794378. This monograph provides a thorough review of earnings quality issues and analysis. Its primary objectives are to help gain a deep understanding of earnings quality and facilitate the development of comprehensive, granular, and contextual earnings quality indicators and analyses. While there are several alternative definitions of earnings quality, the monograph focuses on the earnings sustainability or persistence view, which emphasizes valuation implications. With a working definition of earnings quality, the study then analyzes comprehensive and line-item financial statement indicators of earnings quality, and it relates these indicators to specific earnings quality issues. The monograph also describes nonfinancial indicators of earnings quality, including proxies for incentives and ability to manipulate earnings as well as transactions, events and circumstances that inform on earnings sustainability.
... In addition, several empirical studies support the assumption that accounting earnings are one of the most important components of a firm's financial disclosure. Biddle et al. (1995), Francis et al. (2003), and Liu et al. (2002), for example, documented that investors depend on earnings numbers in their decisions more than on any other measures of a firm's performance. The main goal of the present study is to examine the effect of earnings announcements on the informativeness of stock prices, as inversely measured by stock price synchronicity. ...
... Ferreira and Laux (2007) found that accounting information is a central component of information flow to the market. Biddle et al. (1995), Francis et al. (2003) and Liu et al. (2002) also showed that investors depend on earnings numbers in their decisions more than they do on any other measure of performance. In addition, Francis et al. (2004) argued that earnings numbers are an important part of firm-specific information. ...
Purpose
This study investigates the nature of the association between profit warnings and stock price informativeness in the context of Jordan as an emerging country.
Design/methodology/approach
The authors used a large panel data set that related to stock price synchronicity and profit warnings percentages on the Amman Stock Exchange for the period spanning 2007–2018. Robust regression was used as a parametric test. This enabled us to obtain stronger results that fall in line with our prediction that a profit warning encourages firm investors to collect and process more firm-specific information than common market information.
Findings
Our findings show a significant positive effect of profit warnings on the amount of firm-specific information incorporated into stock price, which means that the greater the percentage of profit warnings the more likely that more firm-specific information will be incorporated in stock price synchronicity. In addition, corporate governance characteristics (moderating variables) significantly increase the level of the relationship between profit warnings and stock price synchronicity.
Practical implications
Our study results could be useful to investors, senior managers, and regulators in Jordanian firms, particularly in relation to decisions about enhancing the quality of financial statements. In addition, our results provide new evidence about the consequences of earnings announcements for information content and the informativeness of stock prices. Our methodology and evaluation of profit warnings may also demonstrate useful evidence for future researchers on profit warnings and stock price informativeness in developing economies, especially given that such evidence is scarce in developing economies.
Originality/value
This research is the first study of its kind on emerging markets, particularly in the Middle East. Moreover, entering the corporate governance variables as moderating variables to the robust regression was found to be more powerful than other regressions.
... In addition, I agree with in that value estimates based on value calculated using the RIVM are accurate, although I advocate that value estimates based on earnings forecasts outperform the former 11 . 11 Consistent with Liu et al. (2002a). In summary, despite the fact that the earnings multiples show an increased performance, the evidence suggests that there are certain multiples that are better for some industries, and no value driver is best for all the industries. ...
... The 7 According to evidence reported byDimson, Marsh and Staunton (2003) and John O'Hanlon and AnthonySteele (2000). 8 Similar to those examined byLiu et al. (2002a). remaining value drivers are converted in a per share basis if divided by the weighted average number of shares in issue during the year, which equals:: Net earnings per share-Adjusted ...
The paper aims at analyzing the performance of two of the equity valuation models, the residual income (RIVM) and the pricing-multiples model. I test first how the residual income valuation model performs relative to the pricing-multiples model for a set of different value drivers and industries, second whether the performance of the different multiples increases when these are measured either with the mean, the median or the harmonic mean of the absolute prediction error and the signed prediction error. The pricing-multiples approach is in most cases a better predictor of market prices than the residual income valuation model. In addition, the harmonic mean yields to more reliable estimates of value for a set of different industries. Finally, there are some value drivers that are supposed to be more reliable than others in specific industries, but there isn't any value driver that dominates all the industries.
... This third measure sets the EBIT DA 2 in relation to the enterprise value of the firm (EV ) (Greenblatt, 2010) (Carlisle, 2014). The enterprise value is defined as the market value of equity plus the value of debt in the company (Liu, Nissim, and Thomas, 2002). As with the ROA the measure incorporates equity and debt, but like the ROE it focuses more on the equity part, in this case represented by the market value of equity (Liu et al., 2002) (Greenblatt, 2010). 1 The relation between equity and debt on a company balance sheet 2 An abbreviation for: Earnings Before Interest, Tax, Depreciation and Amortization. ...
... The enterprise value is defined as the market value of equity plus the value of debt in the company (Liu, Nissim, and Thomas, 2002). As with the ROA the measure incorporates equity and debt, but like the ROE it focuses more on the equity part, in this case represented by the market value of equity (Liu et al., 2002) (Greenblatt, 2010). 1 The relation between equity and debt on a company balance sheet 2 An abbreviation for: Earnings Before Interest, Tax, Depreciation and Amortization. ...
The following chapter develops a linkage between organizational cultural values and firm profitability. After reviewing the literature, it becomes clear that culture plays a minor side role in the analysis of firm profitability. However, scholars mention the impact of cultural values on organizational development which is a core motivation for this study. We build on literature that state a strong linkage between firm performance and organizational culture. We base the construction of profit-enhancing organizational values on a data set of ca. 2.800 value statements of ca. 150 organizations in Europe. We link the values to three different profitability measures that are derived from current research. We analyze which of the values have the strongest association to profitability and with that characterize a profitable firms organizational culture. The results show the domination of business values that are customer-focused and product-related. In addition, values related to human resource play a significant role. By advancing our understanding of organizational culture and its linkage to a firms profitability, we provide a means by which future research into organizational values and corporate culture can progress.
... It should be noted that there is a large number of works about analysis of the financial position of the company in modern conditions. Among them, the following works should be noted [4,20,21,32]. ...
... Trends in the impact of digitalization on financial management are discussed in the following papers [1,9,12,23,33]. Works on the use of the theory of fuzzy sets for building business models based on financial indicators are becoming relevant today [19,21,33]. In this case, the system of indicators is based on certain aspects of the industrial enterprise activity, which reduces the efficiency of management decisions. ...
The article contains the author’s methodological toolkit for managing the financial stability of an industrial enterprise, as well as the results of its use. To manage the financial stability of an industrial enterprise, it is proposed to form signal indicators that allow evaluating the work of circulating capital management. For this, it is proposed to make evaluation according to the following groups of signal indicators: indicators characterizing the level of receivables; indicators characterizing the level of external obligations of the enterprise. The result of the author’s algorithm use is the determination of the integral indicator of financial stability, the value of which includes three components: structure indicators, dynamics indicators and indicators of the intensity of the obligations use. The specific weight of each group was determined by expert judgment and is associated with the recommended values of signal indicators. The results of the calculations show that the use of signal indicators in the management of the financial stability of an industrial enterprise makes it possible to timely identify and eliminate problems in the regulation of circulating capital and to increase the financial potential.
... En el orden de las ideas anteriores, a través del Observatorio Financiero del CEIPA, se realizó un estudio de valoración de las acciones para el sector eléctrico, enfocado en las empresas ISAGEN, CELSIA e ISA. El basamento teórico-metodológico principal de este capítulo está sustentado en el contenido desarrollado y expuesto en el capítulo dos, autores consultados a tal fin fueron Accid (2009), Alford (1992), Amaya (2010), Badenes y Santos (1999), Beaver y Morse (1978), Berk y De Marzo (2008), Bhojraj y Lee (2002), Boatsman y Baskin (1981), Bodie y Merton (1999), Boson, Cortijo y Flores (2009), Court (2012), Damodaran (2006), Demirakos, Strong y Walker (2004), Definición ABC (2009), Fernández (2008, García (2003), García y García (2006), Gómez y Santibáñez (1998), Guijaro y Moya (2007), Land y Lang (2002), Liu, Nissim y Thomas (2002), Kim y Ritter (1999), Parra (2013), Pérez (2017), Quemada (2015), Rincón y Cely (2013), Rutkrowska, Gęstwicki y Williamson (2016), Sabino (1991), Vélez (2006) y Zarowin (1990) y se complementó la información teórica en el marco referencial de este capítulo, considerando las particularidades del sector eléctrico. ...
La electricidad constituye una de las más importantes formas de energía empleadas en la actualidad a nivel global. La vida cotidiana del ser humano se ve influenciada notablemente ya que sin ella no habría la iluminación adecuada, no serían posibles las comunicaciones (radio, tv, teléfonos, internet, etc.) y el desarrollo industrial se vería limitado, esto entre otros inconvenientes; por lo que es poco probable que una sociedad moderna pueda gestarse sin el uso de este recurso energético.
Ahora bien, considerando que la actividad eléctrica afecta de manera directa
los procesos industriales y, por ende, a la economía de un país (con todo lo que
ello implica), su análisis es adecuado para apoyar en la toma de decisiones a
las empresas del sector.
En el orden de las ideas anteriores, a través del Observatorio Financiero
del CEIPA, se realizó un estudio de valoración de las acciones para el sector
eléctrico, enfocado en las empresas ISAGEN, CELSIA e ISA. El basamento
teórico-metodológico principal de este capítulo está sustentado en el contenido
desarrollado y expuesto en el capítulo dos, autores consultados a tal fin fueron
Accid (2009), Alford (1992), Amaya (2010), Badenes y Santos (1999), Beaver y
Morse (1978), Berk y De Marzo (2008), Bhojraj y Lee (2002), Boatsman y Baskin
(1981), Bodie y Merton (1999), Boson, Cortijo y Flores (2009), Court (2012),
Damodaran (2006), Demirakos, Strong y Walker (2004), Definición ABC (2009),
Fernández (2008), García (2003), García y García (2006), Gómez y Santibáñez
(1998), Guijaro y Moya (2007), Land y Lang (2002), Liu, Nissim y Thomas (2002),
Kim y Ritter (1999), Parra (2013), Pérez (2017), Quemada (2015), Rincón y Cely
(2013), Rutkrowska, Gęstwicki y Williamson (2016), Sabino (1991), Vélez (2006) y
Zarowin (1990) y se complementó la información teórica en el marco referencial
de este capítulo, considerando las particularidades del sector eléctrico.
... En el orden de las ideas anteriores, a través del Observatorio Financiero del CEIPA, se realizó un estudio de valoración para el sector petrolero, enfocado en la empresa ECOPETROL, precisamente porque corresponde a uno de los pilares de más importancia para la economía nacional y su desempeño puede influir directa e indirectamente en las cuentas macroeconómicas de la nación. El basamento teórico-metodológico principal de este capítulo está sustentado en el contenido desarrollado y expuesto en el capítulo dos, autores consultados a tal fin fueron Accid (2009), Alford (1992), Amaya (2010), Badenes y Santos (1999), Beaver y Morse (1978), Berk y De Marzo (2008), Bhojraj y Lee (2002), Boatsman y Baskin (1981), Bodie y Merton (1999), Boson, Cortijo y Flores (2009), Court (2012), Damodaran (2006), Demirakos, Strong y Walker (2004), Definición ABC (2009), Fernández (2008, García (2003), García y García (2006), Gómez y Santibáñez (1998), Guijaro y Moya (2007), Land y Lang (2002), Liu, Nissim y Thomas (2002), Kim y Ritter (1999), Parra (2013), Pérez (2017), Quemada (2015), Rincón y Cely (2013), Rutkrowska, Gęstwicki y Williamson (2016), Sabino (1991), Vélez (2006) y Zarowin (1990) y se complementó la información teórica en el marco referencial de este capítulo, considerando las particularidades del sector petrolero. ...
Es evidente que la actividad petrolera puede influir en las finanzas de cualquier país a través de distintas vías, y para el caso particular de Colombia, significa ingresos tanto para el gobierno nacional, así como para otras entidades regionales que se benefician por las regalías que obtienen, por lo que resulta claro que este tipo de actividad puede constituirse como uno de los motores principales para impulsar el crecimiento económico de la nación.
Ahora bien, considerando que la actividad petrolera afecta de manera
directa el rendimiento de la balanza comercial, las finanzas públicas y el tipo
de cambio, su análisis es adecuado para apoyar en la toma de decisiones a las
empresas del sector.
En el orden de las ideas anteriores, a través del Observatorio Financiero del
CEIPA, se realizó un estudio de valoración para el sector petrolero, enfocado
en la empresa ECOPETROL, precisamente porque corresponde a uno de los
pilares de más importancia para la economía nacional y su desempeño puede
influir directa e indirectamente en las cuentas macroeconómicas de la nación.
El basamento teórico-metodológico principal de este capítulo está sustentado
en el contenido desarrollado y expuesto en el capítulo dos, autores consultados
a tal fin fueron Accid (2009), Alford (1992), Amaya (2010), Badenes y Santos
(1999), Beaver y Morse (1978), Berk y De Marzo (2008), Bhojraj y Lee (2002),
Boatsman y Baskin (1981), Bodie y Merton (1999), Boson, Cortijo y Flores (2009),
Court (2012), Damodaran (2006), Demirakos, Strong y Walker (2004), Definición
ABC (2009), Fernández (2008), García (2003), García y García (2006), Gómez y Santibáñez (1998), Guijaro y Moya (2007), Land y Lang (2002), Liu, Nissim y
Thomas (2002), Kim y Ritter (1999), Parra (2013), Pérez (2017), Quemada (2015),
Rincón y Cely (2013), Rutkrowska, Gęstwicki y Williamson (2016), Sabino (1991),
Vélez (2006) y Zarowin (1990) y se complementó la información teórica en
el marco referencial de este capítulo, considerando las particularidades del
sector petrolero.
... whereas for a non-ferrous base metal mine project, EPS2 is more advantageous. Source: (Liu et al., 2002) Multiples are useful because of their simplicity: The financial performance of a company can be valuated quickly and in a relatively straightforward manner, which is why multiples are attractive to investors. However, simplicity may result in inaccuracy. ...
The mining industry is known to be risky. Commodity prices fluctuate widely and frequently drop to below production costs. Resource and reserve estimations are made using sparse grade data and inevitably incur errors. In addition to price and grade, there are a large number of uncertain parameters involved in resource and reserve estimations, including: operating costs; tax rates; discount rates; cut-off grades; water, soil and air characteristics at the mine site; geologic structures; bulk densities of ore and waste; geotechnical characteristics of rock; dilution; mineralogy; texture; equipment availability; ore liberation size; grindability and processing throughput; mining and processing recoveries; and procurement. These uncertainties can be classified as (1) space-dependent (e.g., grade, bulk density, mineralogy, and rock properties), (2) time-dependent (e.g., price and discount rate), (3) design-dependent (e.g., equipment availability and dilution), (4) combinations (e.g., recovery, liberation size, and throughput).Uncertain parameters are further combined in a transfer function. For example, price, discount rate, tonnage, bulk density, recovery, and operating costs are used to calculate the net present value (NPV). In cases where multiple uncertain variables are used, relationships among variables should be quantified or reproduced. Uncertain parameters add risk to a project and further propagate the error. Similarly, as the magnitude of the error grows, the risk involved with the project grows. Therefore, risk analysis is a sensitive process and should be carefully conducted.This thesis focuses on relationships between parameters—namely correlations, dependency, and interaction—used in simulation and forecasting for mine project evaluation. Firstly, in a time-series, correlation was treated as an uncertain parameter through the Jacobi process, and stochastic correlations were generated over time through multiple simulations. The research was then directed towards copulas to reproduce correlations, dependence patterns, and interactions to be used in Monte-Carlo simulations. The performances of copulas and Pearson correlation coefficients were compared in simulations. Finally, for forecasting purposes, the copulas were used to capture the correlation of multiple variables on a time series. Research outcomes showed that reproduction of correlations, dependencies, and interactions significantly affect the quality of simulations and forecasting in mine project evaluation
... Para el caso particular de la investigación que se llevó a cabo, la atención fue centrada en la banca comercial, concretamente en los tres principales: Davivienda, Bancolombia y Banco de Bogotá. El basamento teórico-metodológico principal de este capítulo está sustentado en el contenido desarrollado y expuesto en el capítulo dos, autores consultados a tal fin fueron Accid (2009), Alford (1992), Amaya (2010), Badenes y Santos (1999), Beaver y Morse (1978), Berk y De Marzo (2008), Bhojraj y Lee (2002), Boatsman y Baskin (1981), Bodie y Merton (1999), Boson, Cortijo y Flores (2009), Court (2012, Damodaran (2006), Demirakos, Strong y Walker (2004), Definición ABC (2009), Fernández (2008, García (2003), García y García (2006), Gómez y Santibáñez (1998), Guijaro y Moya (2007), Land y Lang (2002), Liu, Nissim y Thomas (2002), Kim y Ritter (1999), Parra (2013), Pérez (2017), Quemada (2015), Rincón y Cely (2013), Rutkrowska, Gęstwicki y Williamson (2016), Sabino (1991), Vélez (2006) y Zarowin (1990) y se complementó la información teórica en el marco referencial de este capítulo, considerando en particular al sector bancario. ...
Dentro de la historia colombiana, los bancos comerciales se han logrado
beneficiar gracias a las oportunidades, dada la variabilidad del entorno, ya que
en algunos períodos han dependido del sector público y en otras ocasiones del
capital privado. La banca comercial conforma un sector que evoluciona, pues ha
logrado superar momentos difíciles hasta convertirse en parte indispensable del
sistema financiero actual. Con relación a esto último, Londoño, Correa y Lopera
(2014) indican que después de la crisis financiera de 2008, se dieron a conocer
las dificultades propias de muchas instituciones financieras, particularmente, para la estimación del riesgo, que es un factor importante para la valoración
de las organizaciones de cualquier sector productivo.
Por su parte, Ariza (2014) destaca que el sector bancario es un tipo de
negocio de difícil acceso para analizarlo, en particular para personas ajenas a
la institución, también afirma que “los bancos son entidades muy apalancadas,
lo que resulta en valoraciones mucho más dependientes de las cambiantes
circunstancias económicas, en comparación con otros sectores” (p. 6). Para el
caso particular de la investigación que se llevó a cabo, la atención fue centrada
en la banca comercial, concretamente en los tres principales: Davivienda,
Bancolombia y Banco de Bogotá. El basamento teórico-metodológico principal
de este capítulo está sustentado en el contenido desarrollado y expuesto en el
capítulo dos, autores consultados a tal fin fueron Accid (2009), Alford (1992),
Amaya (2010), Badenes y Santos (1999), Beaver y Morse (1978), Berk y De Marzo
(2008), Bhojraj y Lee (2002), Boatsman y Baskin (1981), Bodie y Merton (1999),
Boson, Cortijo y Flores (2009), Court (2012), Damodaran (2006), Demirakos,
Strong y Walker (2004), Definición ABC (2009), Fernández (2008), García
(2003), García y García (2006), Gómez y Santibáñez (1998), Guijaro y Moya
(2007), Land y Lang (2002), Liu, Nissim y Thomas (2002), Kim y Ritter (1999),
Parra (2013), Pérez (2017), Quemada (2015), Rincón y Cely (2013), Rutkrowska,
Gęstwicki y Williamson (2016), Sabino (1991), Vélez (2006) y Zarowin (1990) y se
complementó la información teórica en el marco referencial de este capítulo,
considerando en particular al sector bancario.
Cabe destacar que el trabajo de investigación de este apartado fue
sometido a arbitraje en la Revista de Métodos Cuantitativos para la Economía
y la Empresa con el título Valoración estadística-financiera para mediano
plazo del sector bancario en países con economías emergentes. Caso: Colombia
(Boada y Mayorca, 2019). Los resultados y conclusiones aquí presentados
se tomaron completamente textuales de ese artículo, el cual fue aceptado
y está próximo a publicarse.
... The higher the ratio, the better a firm is able to manage its costs in the process of transforming revenues into earnings. Comparing with other alternatives to measure the efficiency with return on sales, we chose this measure as it eliminates the effects of various noncash expenses (Becker-Blease et al., 2010;Franceschelli et al., 2019;Liu et al., 2002), and it is a good proxy for the amount of cash a company is able to generate (Franceschelli et al., 2019). For all these reasons, the EBITDA ratio is widely used not only in academic publications but also by investors and other corporate finance professionals as a key dimension when evaluating firm performance and efficiency (Pearl and Rosenbaum, 2013). ...
Purpose
Strategic literature has focused on how economies of scale in a firm offering outsourcing may generate incentives for clients to increase the outsourced services, but there has been limited research on how the clients’ features may influence the scope of services that they hire with an outsourcing provider. This study analyzes whether a client’s efficiency motivates it to increase ties with a specific provider of knowledge-intensive services in the context of business process outsourcing (BPO). We further explore whether industry conditions moderate the relationship.
Design/methodology/approach
A research framework is developed consisting of three main hypotheses. We combine industry data and proprietary and financial data from a longitudinal sample of 107 client firms of a multinational outsourcing service provider to test our hypotheses.
Findings
We find that more efficient firms hire more services from an outsourcing provider and that the munificence of the client firm’s industry positively moderates this relationship. Our results suggest that efficient clients can better keep transaction costs under control when accessing, assimilating, and exploiting the knowledge embedded in an expanded set of services provided by an outsourcing supplier.
Originality/value
This study extends the absorptive capacity perspective by showing that a client’s efficiency reinforces its opportunities to absorb knowledge-intensive services from a supplier when expanding the range of operations in the context of BPO.
... In contrast, Paleari et al. (2014) and Vismara et al. (2015) found that the valuation results would be more accurate if underwriters select comparable firms based on the information provided in IPO prospectuses in valuing IPOs. Liu et al. (2002) contended that using algorithms methods could weaken the accuracy of valuation. However, information on IPO valuation can be rarely found in Malaysian IPOs' prospectuses. ...
Purpose
This study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods.
Design/methodology/approach
Cross-sectional data including 467 IPOs listed on the Malaysian stock exchange were used for the period of 2000–2017. This study used univariate ordinary least square (OLS) regression to analyse the relationship between IPOs’ price-multiples and comparable firms’ price-multiples. The test of valuation accuracy was conducted via computing valuation errors by segregating the sample into two groups: fixed-price IPOs and book-built IPOs. Furthermore, multiple OLS regression was used to examine the influence of IPO valuation on underpricing.
Findings
The findings of the results suggested that IPOs price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) multiples were positively related to the median P/E, P/B and P/S multiples of five comparable firms matched by industry and revenues. The P/S multiple was shown to be the most significant valuation method, specifically in book-built IPOs. The findings indicated that those firms that had a lower valuation in comparison to the comparable firms were inclined to underprice their IPOs to allure investors to subscribe IPOs. In addition, book-built IPOs that had fair valuations were inclined to generate higher initial returns for investors.
Practical implications
The findings of this study observed implications for underwriters in avoiding the mis-valuation issue by considering the book-building mechanism.
Originality/value
This study attempted to explore the suitability of the valuation method to value IPOs in Malaysia.
... In the latter the firm received a positive cash flow but it is not wealthier since it has an equivalent future obligation. In this sense, good accruals provide additional information about firms' value not reflected in cash flows (Dechow, 1994;Dechow, Kothri and Watts, 1998;Liu, Nissim and Thomas, 2002). Nevertheless, accruals are only valuable if they link to cash flows. ...
... Therefore, the reliability of financial information is a core need for users of financial information with a very specific focus, to financial analysts who use the reported financial information of earnings to estimate future cash flows, and thereby, the firms value in order to make well-informed financial decisions (Barth et al. 2007). Many studies verified the fact that reported income is the best accounting measurement that presents superior information as the main basis for financial analysis and market value predictions (Liu, Nissim, & Thomas, 2002)and that the more reliable financial statements are (i.e. free of manipulative reporting), the more accurate financial forecasts and fair value estimations are. ...
Our paper aims to study the impact of the regulatory disclosure requirements enacted in 2004 on the income smoothing behaviour (a proxy for quality of financial reporting) and on firm valuation (measured by Topins' q ratio) of Jordanian listed firms on Amman Stock Exchange (ASE). Our perception is that the new disclosure requirements of 2004 hold higher quality as a reporting system for the ASE market than did the one of 1998. A higher reporting quality is expected as the new disclosure requirements of 2004 had removed the conditions over adopting IASB-based standards that existed under the previous regulatory disclosure requirements along with bringing new structural and procedural changes. Previous literature suggested that IASB standards have been long perceived as a set of high quality reporting standards. Under such perceptions, we expect the reporting quality to increase, which in return, would impact the market valuation for listed firms. To perform our study, we selected a sample of 94 out of 133 publicly listed service and industrial Jordanian firms at the ASE. The sample consists of 58 industrial and 36 service listed firms. Our findings indicate a positive impact on both of the quality of reporting and market valuation of service firms with the new regulation of 2004 compared to a negative impact on the quality of reporting and a positive impact on market valuation of industrial firms.
... Our study also contributes to the literature on valuation multiples. Liu et al. (2002Liu et al. ( , 2007 find that on average equity values are more closely related to multiples of historical earnings than to multiples of historical cash flows or EBITDA. Yet, Liu et al. (2007) find that in some industries operating cash flows outperform historical earnings in explaining stock prices. ...
This article regresses the market value of equity on pre-depreciation income and on depreciation expense for capital-intensive firms, referring to the coefficients from our model as valuation weights. The valuation weight on depreciation expense versus the weight on pre-depreciation income are compared, to detect depreciation biases, over time and across sectors. Our model shows that the valuation weights on depreciation expense change over time, if the persistence of the cash flow components of net income varies over time and if the accrual for depreciation is inflexible (e.g., straight-line depreciation). For Real Estate Investment Trusts (REITs), we find the valuation weight on pre-depreciation income increases with industry upturns, while the valuation weight on depreciation expense decreases during upturns. This result is contrasted to the nearly equal valuation weights for the cash flow and depreciation components of earnings for Resource firms (e.g., mines) over time. We conjecture this is because depletion accounting flexibly allows for “depreciation” to exhibit less bias than in other sectors. In summary, actual depreciation practices influence time variation in the valuation of depreciation, a point which has been underappreciated in prior studies.
... For instance, Roosenboom (2007), Paleari et al. (2014) and De Franco et al. (2015) find that practitioners consider five or six peers, on average, while Young and Zeng (2015) use four peers in their simulation. In addition, peer selection is essentially based on the industry criterion (Alford, 1992;Liu et al., 2002), but practitioners also consider other criteria, such as firm size, growth, or profitability, to better account for the heterogeneity in a given industry (Bhojraj & Lee, 2002;Lee et al., 2015). Finally, practitioners may select foreign peers when the number of economically-comparable firms (i.e., selected on various criteria) is limited within a given country. ...
... Jing Liu et al. (2002) empirically investigate the valuation characteristics of value drivers using a fundamental approach that establishes a direct relationship between prices and earnings to price drivers for similar-industry firms in the United States of America. They demonstrated that forecasted earnings using a multivariate approach effectively explain the variation in stock returns for the majority of the sample. ...
The fundamental valuation (FV) perspective has been extended to the Shenzhen Stock Exchange (SZSE) in China by focusing on the role of forecasted earning‐to‐price ratio and return on equity (ROE). Forecasting the variables is being done using a linear dynamic panel data technique. The findings of the two‐step Generalized Method of Moments (GMM) analysis indicate that the forecasted E/P ratio and ROE significantly explain a portion of the variation in the SZSE stock return and remain highly statistically significant after risk proxy variables are included. Additionally, it confirms the existence of size, momentum, liquidity, and dividend yield in the SZSE. This supports the usefulness of an FV perspective based on the unique characteristics of the Chinese equity market in explaining stock returns and their potential utility in forecasting future stock returns.
... Furthermore, investors are also cited in prior literature (i.e. Seow et al., 1995;Liu, Nissim et al., 2002) to depend on earnings numbers when making critical decisions, with this factor more prominent than any other performance measure. Moreover, it is stated in the work of Francis, LaFond et al. (2004) that earnings figures are a fundamental source of organisation-specific data, with Cox, Dayanandan et al. (2017) highlighting a link between profit warnings and abnormal return throughout the period of the announcement day, which may be taken to suggest that such organisation-specific data is used by investors when making investment decisions. ...
This research explores the link concerning informativeness regarding stock price and warnings pertaining to profit in organisations operating in Kuwait as an emerging country. An extensive set of panel data were utilised by the researchers, where such data linked to profit warnings percentages and stock price synchronicity on the Stock Exchange of Kuwait for the years 2010 through to 2020. Multi-regression was chosen to be applied as a parametric test, which provided the ability to garner more robust findings that are seen to be aligned with our belief that, as opposed to common market data. The findings present a wealth of insight concerning the effects of earnings declarations when it comes to stock prices and data content. The approach and assessment of profit warnings presented in this work might also provide further support for researchers seeking to carry out other stock price and profit warnings researches in emerging economics, particularly when considering that support in this regard is seen to be lacking in emerging regions. It is the view of the researchers that the present work is one of very few centres on developing regions, especially those in the GCC (Gulf Cooperation Council). Furthermore, adding to regression corporate governance factors as moderating variables has also been recognised as being far more valuable when compared with other regressions.
... Jing Liu et al. (2002) empirically investigate value drivers' valuation characteristics based on a fundamental approach that demonstrates the direct relationship between prices and earnings to price drivers for the U.S. firms from the same industries. They documented that forecasted earnings based on a multivariate approach efficiently explain stock return variation for most of the sample. ...
This study explores the influence of forecasted earnings to price ratio (E/P) and ROE to explain the part of the variation in the Shanghai Stock Exchange (SSE) returns. The study analyzed the explanatory capacity of fundamental, risk, and combined valuation approaches variables on comparative mode between static and dynamic models with the induction of un-balanced panel data estimation. A linear dynamic panel technique is being undertaken to forecast the variables. The research findings indicate that the forecasted E/P ratio and ROE significantly explain the variation in SSE stock return and remain highly statistically significant after incorporating risk proxy variables. Moreover, the author also confirms the existence of size, momentum, liquidity, and dividend yield in the Shanghai Stock Exchange. The study introduces the fundamental valuation approach to the Chinese market based on its unique features and designs a log-linear model, which comprises forecasted E/P and ROE in addition to current E/P as an estimator for future stock returns. The incorporation of Driscoll and Kraay standard errors (DKSE) and Panel Corrected standard error (PCSE) under static while difference and system GMM under the scope of dynamic panel estimation is considered to be another contribution of the study.
... The ability to give projections has been lauded by SPACs and their target companies. However, because valuations reflect forward-looking information (e.g., Liu et al. 2002), target firms have an incentive to provide optimistic projections when negotiating the purchase price with the sponsor. 1 Although sponsors can perform due diligence, they may agree to a valuation based on optimistic projections for several reasons. First, a sponsor often competes with other sponsors, private equity funds, and strategic buyers for the target firm, potentially creating a winner's curse scenario where the winning bid exceeds the target firm's actual value. ...
Firms’ use of special purpose acquisition companies (SPACs) to go public has increased dramatically, leading to market and regulatory debate about their use of projections. Examining SPAC mergers from 2004 through 2021, we find that 80% of firms provide projections for four years ahead on average, with approximately one-quarter of recent projections extending more than five years. For the sample of SPAC mergers with observable postmerger revenue, we find that only 35% of firms meet or beat their projections. This proportion declines for forecasts that are longer horizon, and nonserial SPAC sponsors miss forecasts by greater percentages. When we compare SPAC projected revenue growth with benchmark samples of firms completing an initial public offering (IPO) and matched firms, the SPAC projections are approximately three times larger on average than benchmark firms’ actual revenue growth, with even greater differences for long-term projections. After the merger, firms reduce their use of projections, providing them at statistically similar rates as benchmark firms. Overall, the evidence supports concerns that the SPAC merger includes highly optimistic projections.
This paper was accepted by Suraj Srinivasan, accounting.
... Accounting earnings are the main accepted metric of financial performance [2,3] and one of the decisive criteria for investment [4]. In the view of managers, earnings play a more important informative role in financial reporting than, for example, cash flows [2,[25][26][27]. Thus, managers are tempted to manage earnings in order to report the expected short-term results even at the expense of the long-term objective of maximizing the value of the firm [26,28,29]. ...
This study analyses the relationship between earnings management and corporate social responsibility. To this end, we use a sample of 568 listed companies from the European Union between 2010 and 2018. We use discretionary accruals as the measure of earnings management, under the Modified Jones model. Corporate social responsibility is proxied by the Combined Environmental, Social and Governance Score from the ASSET4 database. We find a negative relation between earnings management and corporate social responsibility, suggesting that managers from more socially responsible companies have a more ethical behavior and, thus, financial reporting of higher quality. Additional analysis provides evidence that economic cycles and financial performance play important roles in the relation between earnings management and corporate social responsibility. During periods of crisis or of losses, the relationship is positive, suggesting that under unfavorable economic conditions, management makes opportunistic use of a sustainable company’s status to manage earnings.
... It should be noted that there is a large number of works dedicated to the analysis of a company's financial position in modern conditions. Among them, the following works should be noted [1][2][3][4]. ...
In modern conditions, enterprises are faced with acute issues of assessing the activities effectiveness, as well as optimizing costs and searching for the organization internal reserves in order to increase profits. The solution of such problems is possible thanks to competent planning, forecasting and, most importantly, management. Making the right management decisions is possible only on the basis of high-quality and reliable data that can be obtained using mainly advanced and perfect analysis methods. Enterprises of the energy complex in most cases have a complex hierarchical structure and a wide geographical distribution, in connection with which there is a need to improve the methodology of the effectiveness of their activities analyzing. The purpose of this study is to develop a methodology for analyzing the efficiency of the fuel and energy complex enterprises.
... We measure information precision by accrual quality, earnings value relevance and the precision of analyst forecasts (Francis et al. 2008, Bhattacharya et al. 2012). Earnings quality metrics are a natural choice for precision, given that investors regard earnings as an important indicator of a firm's future financial performance (Biddle et al. 1995, Liu et al. 2002. The accrual quality metric is based on the McNichols (2002) modification of the Dechow-Dichev (2002) model, which has the form: ...
We use structural equation modelling for a robust test of the role information quality plays in explaining the cost of equity capital (CoE). SEM allows us to reliably identify the direct and indirect effects that three information quality attributes, quantity, asymmetry and precision, have on CoE. The method also reduces the error-in-variables problem, which stems from selectivity in proxies for information quality and CoE. Using nine proxies to capture the variation in information quality attributes and nine CoE measures, we document that the direct effects of precision and asymmetry are equally important in explaining variation in CoE, while quantity has a negative direct effect. Quantity has a positive indirect effect on CoE mediated through asymmetry and precision. The strength of the relations we identify varies according to firm size, maturity, profitability and with proxies for CoE, which suggests that sample compositions and measurement choices affect the power of tests. Our results consolidate mixed evidence on the relation between information quality and CoE that is often based on a single measure of information quality and ignores indirect channels.
This paper examines whether firms that engage in corporate social responsibility activities (CSR firms) manage reported cash flows from operations (CFO) when they have strong credit market incentives. We find that CSR firms near financial distress and those having a long‐term credit rating near the investment/non‐investment grade cutoff are more likely to inflate reported CFO, compared to all other firms. We also find evidence that CSR firms with these credit market incentives appear to resort mainly to classification rather than timing as a tool for managing CFO. Further, we find that the degree of CFO management performed by those CSR firms is more pronounced under weaker corporate governance. Overall, our findings suggest that CSR firms with stronger credit market incentives are more likely to manage CFO, and that such CFO management behavior is likely to be implemented at the expense of shareholders’ interest.
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O presente trabalho teve por objetivo identificar indicadores preditivos para o preço das ações de empresas do subsetor da agropecuária da B3, através da análise por múltiplos. Os dados das empresas do subsetor agropecuária foram levantados por meio do Economática, no período de 2011 a 2015, sendo realizadas análises de regressão linear múltipla. Os resultados mostraram que indicadores como Liquidez Corrente (LC) e Preço por Valor Patrimonial por Ação (P/VP) possuem maior capacidade de predição do valor das ações das organizações investigadas. Com isso, os múltiplos da análise fundamentalista, em especial aqueles com representação direta, demonstram capacidade efetiva de predição do valor da empresa em termos de ações, pautando decisões de investimento. O estudo contribuiu para a análise de múltiplos, dentro do setor de agronegócio, cuja capacidade preditiva se mostrou profícua para a verificação do quanto o valor patrimonial por ação equivale ao preço da ação negociado em mercado.
Valuation analysts adjust prices of private firm’s stock downward from their fully marketable counterparts, reflecting the private firms’ lower level of marketability. This discount for lack of marketability can be substantial in magnitude. This study examines the performance (according to bias and accuracy employing estimation error methodology) of seven popular option pricing models in generating discount estimates to coincide with empirically observed discount benchmarks (based on the pre-IPO methodology) in European Union member countries over the period 2004 until 2018. The results allow for the general conclusion that some option pricing models are superior in most settings, coinciding with their individual benefits and deficiencies. The detailed analysis indicates that (i) the superiority of these option pricing models holds for a wide range of periods of assumed restricted marketability, (ii) segmenting discount benchmarks according to their size improves the performance of the option pricing models, (iii) segmenting discount benchmarks according to both, the underlying volatility of stock returns and dividend yields, does not improve the performance of the option pricing models, and (iv) IPO underperformance has no material impact on relative option pricing model’s performance.
Using extensive manually collected data on granted patents, this study examines the effects of the degree of a firm’s information asymmetry on corporate innovation in the Korean market, which is characterized by weak transparency and active firm innovation. Based on four measures of information asymmetry, we find that the quality of information about a firm has a positive influence on its innovation activities. In addition, this influence is more evident in firms with poor corporate governance practices and in Chaebol-affiliated firms. Overall, this study offers insights on the importance of information quality for firms planning investments in innovation, which is a long-term and highly uncertain commitment. An important policy implication is that regulatory authorities should promote the timely and reliable disclosure of information on firms.
It is difficult to predict future payoffs for initial public offerings (IPOs), since the multiple valuation method used to determine IPOs’ prices provides estimates by reflecting current sentiments in specific market environments. As our model reflects accounting information and stock price, we find that the mean absolute percentage error that verifies the accuracy of IPO stock valuation improves return on investment by 15% to 20%. This can help shareholders and investors accurately estimate stock prices and engage in efficient investment decision-making, while contributing to fintech by applying machine learning to traditional techniques to analyse investment opportunities and optimise trading strategies.
Purpose
The purpose of the study is to examine the value-based performance of firms in construction sector in India using Tobin's Q and Market Capitalization (MCAP) and then determine their significant financial drivers.
Design/methodology/approach
The study is based on data from 87 firms engaged in infrastructure, real estate, industrial construction and allied areas in India over a study period of 10 years. Three distinct forms of panel regression models have been developed using Tobin's Q and MCAP as dependent variables. The models developed are using Baltagi's (1981) Error Component 2SLS, Varadharajan-Krishnakumar's (1987) Generalized 2SLS and Arellano – Bower/Blundell – Bond's (1991) dynamic panel.
Findings
The study found that MCAP is a better suited value-based performance measure for construction sector firms in India. The study further reports that the age of the firm, profit after tax, investment in research and development, dividends, leverage and net fixed asset are significant positive drivers, whereas cash flow is a significant negative driver.
Research limitations/implications
The study is limited to a geographic location; therefore, the findings of this study cannot be generalized.
Practical implications
As MCAP is a better suited value-based performance measure of a firm in the construction sector, managers should focus on improving profitability, higher research and development activities, higher dividends and higher expenditures on net fixed assets for improvement.
Originality/value
This is an original attempt to examine the value-based performance of firms in the construction sector in India using Tobin's Q and MCAP.
El fenómeno de la globalización, como proceso dinámico presente desde hace ya
muchos años, influye en todos los ámbitos de la sociedad en términos de rapidez,
intensidad e impacto y el área empresarial no se escapa de esto. Actualmente,
cualquier organización puede llegar a encontrarse, en un momento dado,
dentro de un escenario de cambios drásticos que en ocasiones son difíciles y
complicados de manejar, por lo que esta volatilidad del entorno pudiera afectar
significativamente tanto a la propia organización, así como también a las demás
empresas del ramo.
Cabe agregar que la complejidad del fenómeno de la globalización exige
que las organizaciones deban adecuarse a un modelo gerencial que les permita
ser competitivas y adaptativas, en función a los cambios en los entornos
mundial, nacional y regional. Con relación a lo anterior, un aspecto a considerar
dentro de ese modelo de gestión lo constituye el proceso de valoración de
una empresa, ya que evaluar oportunamente el mercado financiero constituye
una actividad esencial para todos los que hacen vida gerencial en los distintos
sectores económicos. A través de la valoración, se puede establecer un rango
de valores con la confianza de que se encuentre entre ellos la valía de una
compañía en actividad; esa labor es difícil, si se considera que la organización
se encuentra inmersa en un ambiente caracterizado por la alta fluctuación y
riesgos permanentes.
O price-to-book (P/B) tem muitas aplicações, por exemplo: avaliação de empresas e explicação do retorno dos ativos. Nesta última aplicação, o P/B é utilizado para completar a explicação do beta no retorno dos ativos, na hipótese de que o beta não meça risco ou não meça todo o risco. A significância do P/B na explicação do retorno não é unanimidade. Pode ser que existam variáveis sob influência dos gestores que possam descaracterizar o P/B, obscurecendo os resultados de tais pesquisas. Duas potenciais variáveis são: (a) o ajuste de avaliação patrimonial e (b) as provisões para contingências que, dentro de certos limites, estão sob a influência dos gestores. Portanto, o objetivo do presente artigo é verificar a significância destas variáveis na explicação do P/B. Estudando-se empresas listadas na B3 ao longo de 28 trimestres por meio de dados em painel, identificou-se que: (a) o ajuste de avaliação patrimonial não é significativo e (b) as provisões para contingências são positivamente significativas, na explicação do P/B. Os resultados sugerem que: (i) provisões para contingências sejam incluídas nas explicações de retorno em conjunto com o P/B e (ii) os testes sejam repetidos para um período anterior ao testado, quando a lei 11.638/07 não vigorava.
This thesis presents a set of seven chapters that can be grouped into two sections namely Part I-what can a new measurement of culture look like? and Part II-which roles do culture play in a firms economy? The chapters cover the description of organizational values, the impact of organizational culture on a company's profitability, the role of culture in acquisitions or the country-specific differences in corporate culture. All chapters except for Chapter 6 use a new method for quantifying textual data. They incorporate natural language processing, techniques from text mining, non-linear modeling and machine learning. With this, we can summarize the chapters under the title NLP as a way to analyze corporate culture.
The paper extends the research on the ability of dividends to predict three equity valuation attributes: net earnings, cash flows from operations, and abnormal net earnings. Results from 264 companies that traded on the GCC Exchange during 2006-2016 provide the following insights. First, current dividends are value-relevant in predicting future net earnings, cash flows from operations, and abnormal net earnings. Second, current dividends are better predictors of these aspects over the short horizon than over the long horizon. Finally, in explaining the dividend policy, future net earnings have better incremental information than cash flows from operations and abnormal net earnings, and cash flows from operations have better incremental information than abnormal net earnings. These results have important implications for potential investors. To know the relationship between current dividends and future stock prices is considered important for Investors' decisions in the GCC countries. This paper can be considered the first paper that studies the association between dividends and other three different equity valuation attributes as a comparative study of six emerging countries.
In capital markets, the investment decision-making process is vastly influenced by accounting information. This paper addresses equity investment valuation through market multiples and its consequences in investors’ financial statements under fair value accounting principles. After replicating the valuation process through the most used market multiples (price-to-forecasted earnings; market-to-book; enterprise-value-to-performance indicators), the authors analyze the distribution of the estimated-to-actual fair value ratio under the IFRS 13 perspective and the effects of a randomly selected portfolio on the balance sheet and income statement of the investor. The study’s primary findings are that the market multiples tend to produce consistent results in 7 (at least) to 20 (at best) out of 100 cases, and over or underestimate the fair value in all the remaining cases without any apparent or predictable reason. The results of the paper confirm what previous literature underlined by studies conducted on older data and with a different geographical scope (Kim & Ritter, 1999; Lie & Lie, 2002; Palea & Maino, 2013). The results and the literature suggest being particularly cautious in applying the market multiples valuation method for estimating the fair value of an equity investment, given the preference that accounting principles accord to the Level 2 market-comparable methods, which also seem to be the most used ones in practice
The increasing amount of data and the importance of soft factors affecting economic prosperity make this work an interesting and important read. The chapters in this book have in common that natural language processing helps to understand organizational cultural values.
The first part discusses and forms a new method to analyze cultural values derived from textual statements. Here, we discuss the applicability of natural language processing (NLP)
in economic research.
The second part applies the method of NLP in organizational cultural values and links the measurement of culture to economic metrics from profitability to M&A success measurement. The results show the importance of product-, organizational- and incentive related values to form a favorable environment for economic prosperity.
In this chapter, we investigate whether culture-related difficulties arise in the merger between Maersk and Hamburg Sued. Culture has a major impact on the success of M&A transactions and can make or break a merger or acquisition. In this chapter we analyze which cultural values might play a major role in this case. The difference of organizational culture might further more influence cross-border merges however, specific culture values might be relevant too. The application of Hofstede's dimensions of organizational culture makes the results comparable with other scholars' findings. Setting out to find which cultural elements influence the acquisition of Hamburg Sued through Maersk, we describe both parities organizational culture and highlight critical points. We furthermore reflect on the influence that these critical points have on the acquisition. The primary factor remains the flexibility of a culture in order to complete a successful acculturation process.
Innovative startups are newly formed companies with high growth potential, which usually absorb a lot of liquidity in the early years of life, to finance development, against minimal collateralizable assets. This is unattractive for traditional banking intermediaries, usually replaced by other specialized intermediaries as venture capital or private equity funds, which diversify their portfolio basing their strategies on a multi-year exit with substantial expected increases in value from investments that survive a Darwinian selection. The role of professional intermediaries is often decisive along the selective road from startup to scale-up.
This study examines the link between ownership structure and political spending disclosure (PSD). We break down ownership into four different groups of shareholders: institutional, insider, governmental and foreign. Using a unique dataset provided by CPA-Zicklin for PSD and a panel dataset from S&P 500 companies between 2015 and 2018, our results reveal that institutional and governmental ownership are positively associated with the level of PSD, while insider ownership is negatively associated with the level of PSD. Additionally, while prior literature mainly investigated how ownership structure influences disclosure practices, we analyse the mechanisms through which ownership characteristics influence PSD. Our cross-sectional tests provide evidence that insider owners exhibit more PSD if they are pursing tax-related lobbying expenses and tax avoidance practices. Additionally, governmental owners demand lower PSD in firms with higher nonfinancial and financial reporting quality. Finally, institutional owners demand more PSD in the case of lower industry concentration. Overall, we conclude that different owners have distinct impacts and preferences on a firm’s political strategy and various mechanisms uniquely operationalize the interactions between different owners and political transparency. Through agency theory, our results advance heated debates on PSD – an emerging, yet hitherto less examined, category of voluntary disclosure.
With the linkage of acquisition performance metrics to organizational cultural values, the chapter delivers an insight into the role of culture on a firm-specific level. M&A transactions have a high impact on an organization's history and research finds that culture has a great influence on the outcome of these transactions. Hence, this study is valuable. Beside the actual findings, the chapter is an application of a rather new method used in this dissertation for cultural and social science research, called text mining in combinations with machine learning models. Along the analysis, the chapter compares three measures for acquisition performance and its relation to organizational cultural values. The result reveals that elitist values influence value creation after acquisitions. The analysis indicates that an adaptive organizational culture which is opportunity seeking, supports value creation in the M&A context whereas contradicting values can be value-destroying or are at least associated with a lower value creation.
This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors' decisions in these countries. In settings in which investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client-auditor bonding should have less of an effect on investors' decisions.
We investigate how asymmetric cost behavior (also termed cost stickiness) affects peer-based valuation models. Using a sample of U.S. firms for the period 2000–2016, we provide evidence that the higher the degree of a target firm`s level of cost stickiness vis-à-vis its peer group, the greater is the peer-based underestimation of the firm’s market value (downward peer-based valuation bias). Furthermore, we show that the underestimation of firm value is weaker for firms exhibiting potential for agency issues. Overall, our findings suggest the following: First, using information on cost management strategies reduces the downward peer-based valuation bias. Second, investors partially understand and incorporate available information about cost stickiness into their evaluation of firm value, c.p. leading to deviations from the value estimates of the peer-based models. These models generally do not recognize information on cost stickiness as an input factor. Ultimately, the findings support the assumption that investors assess the likelihood that cost stickiness is either driven by economic or non-economic reasons and adapt their value estimate accordingly.
8., vollständig überarbeitete und erweiterte Auflage 2021 Dieses Buch ist eine grundlegende und zugleich vertiefende Einführung in den Bereich der Unternehmensbewertung. Es ist konzipiert für Studierende der Betriebs- und Volkswirtschaftslehre und des Rechts, für Wirtschaftsprüfer, Unternehmensberater, Investmentbanker, Steuerberater und alle mit dem Erwerb, Verkauf bzw. der Restrukturierung von Unternehmen befassten Praktiker. Der gesamte Text der Vorauflage wurde überarbeitet, z. T. gestrafft und in einigen Teilen deutlich erweitert. Nach den einleitenden Kapiteln 1 bis 3, die Grundlagen der Bewer- Bewertung bei Unsicherheit unter Beachtung von Steuern präsentieren, startet die Behandlung tung des Kerns des Buches in Kapitel 4, das die Konzeptionen der DCF-Bewertung vorstellt. Kapitel 5, überschrieben mit „Bewertungsrelevante Überschüsse“, diskutiert neben deren Definition auch deren Planung einschließlich verschiedener Ausprägungen der Gestaltung der Lebensphasen eines Unternehmens und damit des Wachstums. Die Kapitel 6, 7 und 8 behandeln die Bewertungsansätze, die in Literatur und Praxis als herrschend anzusehen sind: APV-Ansatz, WACC-Ansatz und Flow-to-Equity-Ansatz bzw. Ertragswertmethode. Wir bemühen uns, die relativen Vor- bzw. Nachteile der Methoden detailliert und anschaulich zu erläutern. Anzufügen ist, dass diese relativen Vorteile oder Nachteile in späteren Kapiteln des Buches ebenfalls deutlich zutage treten werden. Dies gilt z. B.– aber nicht nur– für das Kapitel10, das über Rückstellungen und Unternehmenswert referiert. Kapitel 9 behandelt den Diskontierungssatz, dessen Bestandteile und die Möglichkeiten der Messung. Erweiterungen des Problemgefüges finden sich in den folgenden Kapiteln. Kapitel10 greift das in der Literatur nur stiefmütterlich behandelte Problem des Zusammenhangs zwischen Rückstellungen und Unternehmenswert auf. Kapitel 11 untersucht den Kontext zwischen Finanzierungsleasing und Unternehmensbewertung. Dabei bilden wir auch die Auswirkungen des IFRS 16 auf die Unternehmensbewertung ab. Kapitel 12 und 13 bringen die ökonomische Schieflage von Unternehmen und damit die Bewertung von Eigentümer- und Gläubigerpositionen bei Ertrags- und Liquiditätsdefiziten ins Spiel. Kapitel 12 erläutert zunächst, welche Kriterien in Form sog. „Eröffnungsgründe“ die deutsche Insolvenzordnung kennt, um eine ökonomische Situation, die Gläubigerpositionen mit Ausfallrisiko belastet, zu markieren und welche Schwachstellen diese Kriterien aufweisen. Dies hat Konsequenzen für die anstehenden Restrukturierungsentscheidungen, die innerhalb oder außerhalb eines Insolvenzverfahrens zu treffen sind. Bei Restrukturierungen im Schatten einer ökonomischer Schieflage kommt der Bewertung der Position der Alteigentümer eine besondere Bedeutung zu. Wir erläutern den ökonomischen Kontext des Problems, der sich auftut zwischen dem Anreiz zu einer zeitigen Eigentümer-gesteuerten Initiierung eines Restrukturierungsprozesses und dem hinter der Prioritätenrangfolge der Ansprüche stehenden Sanktionscharakter der Insolvenzordnung. Wir zeigen auch, wie brauchbar sich der APV-Ansatz erweist, wenn es um eine transparente Aufbereitung der ökonomischen Folgen einer Sanierungsstrategie, z. B. in Form eines Debt-Equity-Swaps, geht. Kapitel 13 analysiert die Kalküle derjenigen, die bei temporären Ertrags- und Liquiditätsdefiziten, in der Vorinsolvenzphase oder im Rahmen eines Insolvenzverfahrens über Kreditverlängerung, Besicherung, Liquidation oder Fortführung mit oder ohne Insolvenzplan und die Neuzuordnung der Anteilsrechte entscheiden. Es stellt einen allgemein einsetzbaren Formelapparat bereit, der relevant wird, sobald Gläubiger Ausfallrisiko übernehmen. Wir haben das Kapitel um eine Würdigung des IDW Praxishinweises 2/2018 „Zur Berücksichtigung der Verschuldungsgrads bei der Bewertung von Unternehmen“ erweitert. Kapitel 14 behandelt Fragen und Ansätze der periodischen Performancemessung, die präzise Methoden der Bewertung voraussetzen, wenn man mindestens Barwertkompatibilität oder – anspruchsvoller – Barwertidentität verlangen will. Dabei stellen wir auch die aus Literatur und Praxis bekannten Konzepte wie EVA™ oder CVA vor und ordnen sie konzeptionell ein. Kapitel 15 wirft einen Blick auf die Bewertung von Unternehmen mittels Multiplika- Multiplikatoren, wobei auch den Querverbindungen unter den verschiedenen, in der Praxis zum Einsatz kommenden Multiplikatoren Aufmerksamkeit gewidmet wird. Nicht verändert hat sich unsere kritische Einstellung gegenüber diesem Bewertungsansatz. Kapitel 16 haben wir überschrieben mit „Gutachtenpraxis und Rechtsprechung“. Wir haben es erweitert um eine kritische Auswertung von fast 300 Bewertungsgutachten und einigen Dutzend Gerichtsentscheidungen, die sich mit einer Reihe dieser Gutachten auseinandersetzen. So können wir nach einer zusammenfassenden Darstellung der Rechtsprechung weiter untersuchen, wie diese Gutachten von den Gerichten gewürdigt werden und welche Änderungen vorgenommen werden. Zudem berechnen wir auch die Werteffekte, die durch die richterliche Korrektur der gutachterlichen Bewertung ausgelöst werden. Kapitel 17 ist neu. Es ist der Bewertung von Überschüssen in Fremdwährung gewidmet. Wir zeigen mögliche Bewertungsansätze auf, würdigen die Relevanz von Terminwechselkursen und weisen auf Besonderheiten bei der Abbildung von Fremdfinanzierungen in fremder Währung und Steuereffekten hin. Kapitel 18 bietet zahlreiche Übungsaufgaben an. Kurze Lösungshinweise sind beigefügt. Zudem haben wir die Übungsaufgaben durch Excel-Tabellen so aufbereitet, dass die eigene Entwicklung von Finanzplänen, Zufallsbäumen etc. nicht mehr erforderlich ist. Die Nutzung der Übungsaufgaben, die wir empfehlen, ist somit erheblich erleichtert. Wer an anspruchsvolleren und realitätsnahen „Aufgaben“ zur Bewertung von Unternehmen interessiert ist, sei auf unser Buch „Akquisitionen, Börsengänge und Restrukturierungen: Fallstudien zur Unternehmensbewertung“ verwiesen, das im gleichen Verlag erschienen ist. Zu den lebensnahen Fällen, die von der Bewertung mittelständischer GmbHs bis zu Großunternehmen (Fraport, Philipp Holzmann) bzw. Großprojekten (Airbus A380, Eurotunnel) reichen, bietet das Buch neben Sachverhaltsbeschreibungen und Daten auch ausführliche Lösungsvorschläge. Alle Berechnungen einschließlich der Lösungen der Übungsaufgaben stehen auf der Website zu diesem Buch unter http://www.vahlen.de/31026831 zum Download bereit. Wir haben in die einzelnen Kapitel eine Reihe von Wissensbausteinen eingearbeitet. Diese fassen die Kernbotschaften eines Abschnitts zusammen und repräsentieren aneinandergereiht die Essenz unseres Buches.
This empirical research aims to look at the factors that mark the financial performance of Islamic and traditional banking sector in Pakistan. The results of the data signify that gross domestic product and inflation is connected to the financial performance of Islamic banks in all aspects of profitability ratios and gross domestic product has insignificant relation with the return on equity and assets of conventional banks. Inflation has a weighty effect on return of assets of conventional banks. Further results indicate a negative impact of bank size on return of assets Islamic and positive impact on conventional banks. A negative impact of bank size on return on equity of Islamic and positive impact on conventional banks. There is no performance impact of bank size on price earnings ratio. Results also indicate that a negative performance impact of age of bank on return on assets of Islamic and traditional banks.
The use of arithmetic mean to average multiples is mathematically incorrect. The multiple is an inverted ratio with price in the numerator. Therefore, the harmonic mean should be used as the appropriate measure of central tendency. As a crosscheck, the median should also be considered.
Globally, technology firms are characterized by high level of innovation, rapid obsolescence of technologies, high investment risk and unpredictability of future cash flows. All these make conventional discounted cash flow valuation methods inadequate for valuation of technology firms. This study aims to develop sector regression models for relative valuation of technology firms by evaluating firm-level determinants of price multiples. Results suggest that price to book is the most appropriate multiple for valuing developed market technological firms, whereas price to sales is the most apt multiple for emerging market firms. Variable selection by least absolute shrinkage and selection operator (lasso) validates that growth rate, research intensity and cash holding influence value of price multiples for both developed market and emerging market firms. Similarly, smaller firms tend to generate higher value of the multiples under both categories. Firms’ ESG practices is an important determinant of price multiples for developed market firms, however, it does not influence the multiples’ value for emerging market firms.
It is widely shown that stocks with higher asset growth paradoxically earn lower returns (hereafter, the asset growth anomaly). Studies have pointed towards errors in expectations, over‐investment and limits‐to‐arbitrage as potential causes of misvaluation, the most documented explanation of the asset growth anomaly. What studies have not yet done, however, is provide compelling evidence that mispricing is the cause of the anomaly. Using a multiples valuation approach to calculate a direct proxy of mispricing (i.e., a firm‐specific misvaluation level relative to peers), this study shows that the negative relation between asset growth and subsequent returns occurs in undervalued stocks, whereas it is absent in overvalued stocks. By comparing and contrasting the theories on real options and asset pricing, the findings suggest that the asset growth anomaly is driven by the real options component, particularly for undervalued firms. The findings therefore provide new evidence in the mispricing‐based hypothesis for the asset growth anomaly.
We analyze industry multiples for the S&P 500 in 1995. We use Gibbs sampling to estimate simultaneously the error specification and small sample minimum variance multiples for 22 industries. In addition, we consider the performance of four common multiples: the simple mean, the harmonic mean, the value-weighted mean, and the median. The harmonic mean is a close approximation to the Gibbs minimum variance estimates. Finally, we show that EBITDA is a better single basis of substitutability than EBIT or revenue in the industries that we examine.
This paper evaluates the valuation accuracy of the price-earnings (P/E), the price-book (P/B) and a combined price-earnings and price-book (P/E-P/B) benchmark valuation methods. Performance of the benchmark valuation methods relies on the definition of comparable firms. In this paper, comparable firms are selected based on industry membership, size and return on equity as well as combinations of industry membership with size and with return on equity. We find that within the P/E and P/B benchmark valuation methods, the best definition of the comparable firms are based on industry membership combined with return on equity. However, only the industry membership is necessary to define the comparable firms for the combined P/E-P/B method. In sum, the results suggest that, when firm's value is unknown, the combined P/E-P/B valuation approach selecting comparable firms based on industry membership performs the best among all the approaches evaluated in this paper.
We also find that the P/E benchmark valuation method performs better than the P/B benchmark valuation method and the combined method outperforms either the P/E or the P/B method. These results imply that earnings are more important than book value as a single-number firm valuator over our sample years (from 1973 to 1992) and that both earnings and book values are value relevant, one does not substitute perfectly for the other.
Using a sample of forty-nine countries, the authors show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries. Coauthors are Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. Copyright 1997 by American Finance Association.
The returns earned by U.S. equities since 1926 exceed estimates derived from theory, from other periods and markets, and from surveys of institutional investors. Rather than examine historic experience, we estimate the equity premium from the discount rate that equates market valuations with prevailing expectations of future flows. The accounting flows we project are isomorphic to projected dividends but use more available information and narrow the range of reasonable growth rates. For each year between 1985 and 1998, we find that the equity premium is around three percent (or less) in the United States and five other markets.
This paper introduces a series of valuation models that mimic important features of regulatory prescriptions and legal precedent for the method of comparables as applied in estate and gift tax cases. We evaluate the models using out-of-sample estimation to determine which ones have the most desirable statistical properties for prediction. We then compare the predictions from these models to the valuations put forth by taxpayers, the IRS, and judges in estate and gift tax cases. This analysis reveals that taxpayers and the IRS propose values consistent with their underlying incentives, but significantly different from most bias-adjusted forecast models. The judges choose values consistent with the average value of the two experts and with bias-adjusted forecast models. Thus, the tax litigation system appears to ultimately produce an estimate of value that is consistent with an objective application of the method of comparables to the available data.
In this paper I measure the importance of three groups of factors in the pricing of U.S. Internet stocks: economic fundamentals, web traffic, and supply and demand forces. Using log-linear regression on a panel of data for Net and non-Net stocks on 2/1/2000, I highlight five findings. First, contrary to popular perception, neither web traffic or supply and demand forces drive Net stock prices. Rather, economic fundamentals in the form of current book equity, forecasted one-year ahead earnings and forecasted long-run earnings growth dominate in explaining cross-sectional variation in Net stock prices. Second, incremental to economic fundamentals, Net firms' equity market values are reliably related to only one measure of web traffic-the number of unique visitors to the firm's web site. Net firms' equity market values are unrelated to the number of page views, hours spent at the website, the average age and the average income of visitors. Third, over and above economic fundamentals and web traffic, Net firms' equity market values are reliably correlated with proxies for supply and demand forces in the form of public float, short interest and institutional ownership. Fourth, the value-relevance of supply and demand factors only exists for Net firms with no business-to-consumer web traffic, suggesting that the public familiarity that business-to-consumer e-commerce creates leads to greater capital market efficiency in the pricing of their stock. Finally, the equity values of non-Net stocks are unrelated to supply and demand forces, yet are strongly associated with economic fundamentals. Overall, I conclude that while the pricing of U.S. Net stocks is dominated by expectations of near- and long-term profitability, they are also uniquely impacted by non-traditional value-drivers in ways that non-Net firms are not.
Although much market-based accounting research is based on regressions of abnormal returns on contemporaneous unexpected earnings, many have despaired about the intrinsic ability of accounting earnings to explain stock returns. These regressions exhibit low R2, lower than expected coefficients on unexpected earnings (ERC's), and various unusual features including non-linearity, lower R2 and response coefficients for loss firms, and lower R2 and response coefficients for high-growth and high-tech firms. Some improvement in explanatory power has been achieved by including various proxies for information that is currently available about future period earnings. This paper contributes to that line of research by deriving a specification, from the abnormal earnings model, that extends the traditional ERC regression by including current period forecast revisions of future period earnings. Relative to the traditional regression, the full specification increases R2 substantially, reduces the bias in coefficient estimates (caused by omitted correlated variables), and mutes the three unusual features mentioned above.
Using financial accounting data from manufacturing firms in 16 countries for 1986-1995, we demonstrate that the value relevance of financial reports is lower for countries where the financial systems are bank-oriented rather than market-oriented; where private sector bodies are not involved in standard setting process; where accounting practices follow the Continental model as opposed to the British-American model; where tax rules have a greater influence on financial accounting measurements; and where spending on auditing services is relatively low. Results are robust to alternative measures of value relevance of financial accounting data, including measures based on earnings (using a regression and a hedge-portfolio approach), accruals, and earnings and book value of equity combined. We show that the extent to which earnings information is reflected in leading-period returns as compared to contemporaneous returns is greater for bank-oriented than for market-oriented countries. This feature potentially induces spurious associations between value relevance measures and financial system characteristics. Our results are robust to using value relevance measures adjusted for this confounding effect.
In this paper we provide insights into the manner in which (relatively sparse) accounting information, along with measures of internet usage, are employed by the market in the valuation of internet firms. Consistent with those who claim that financial statement information is of very limited use in the valuation of internet stocks, we are unable to detect a significant positive association between bottom-line net income and our sample firms' market prices; in fact, the association is actually negative. However, when we decompose net income into its components, we find gross profits to be positively and significantly associated with prices. In addition, both unique visitors and pageviews, as measures of internet usage, are found in most instances to provide incremental explanatory power (in some cases considerable) for stock prices. We also separately analyze the e-tailers, and the portal and content/community firms (the p/c firms) in our sample. For the e-tailers we find that bottom-line net income generally has a negative association with stock prices (as for the sample as a whole), while a positive and significant association exists for the p/c firms. In this respect, p/c firms' shares behave more like those of non-internet companies. Further, we find for the p/c firms that the incremental explanatory power of pageviews and of unique visitors is approximately the same; in contrast, pageviews has much greater incremental explanatory power for the e-tailers than does unique visitors. This suggests that pages viewed per visitor is an especially important metric for the e-tailers, as compared to the p/c firms.
We use a discounted residual-income valuation model to compute an ex-ante cost-of-capital for a large sample of U.S. stocks that are covered by I/B/E/S analysts. We show that the ex ante cost-of-capital computed in this manner is correlated with a firm's degree of leverage, market liquidity, information environment, and earnings variability. Specifically, the market demands a higher risk premia for stocks with high book leverage and market leverage, low dollar trading volume or market capitalization, low analyst coverage, and more volatile (less predictable) earnings. The market also demands a higher risk premia for stocks with high book-to-market ratios and low price momentum. Traditional market risk proxies such as beta and return volatility are not significantly correlated with the ex ante cost-of-capital.
This paper models the relation between a firm's market value and accounting data concerning operating and financial activities. Book value equals market value for financial activities, but they can differ for operating activities. Market value is assumed to equal the net present value of expected future dividends, and is shown, under clean surplus accounting, to also equal book value plus the net present value of expected future abnormal earnings (which equals accounting earnings minus an interest charge on opening book value).
In this study, we propose an alternative technique for estimating the cost of equity capital. Specifically, we use a discounted residual income model to generate a market implied cost-of-capital. We then examine firm characteristics that are systematically related to this estimate of cost-of-capital. We show that a firm's implied cost-of-capital is a function of its industry membership, B/M ratio, forecasted long-term growth rate, and the dispersion in analyst earnings forecasts. Together, these variables explain around 60% of the cross-sectional variation in future (two-year-ahead) implied costs-of-capital. The stability of these long-term relations suggests they can be exploited to estimate future costs-of-capital. We discuss the implications of these findings for capital budgeting, investment decisions, and valuation research.
This study examines the usefulness of an analyst-based valuation model in predicting cross-sectional stock returns. We estimate firms' fundamental values (V) using I/B/E/S consensus forecasts and a residual income model. We find that V is highly correlated with contemporaneous stock price, and that the V/P ratio is a good predictor of long-term cross-sectional returns. This effect is not explained by a firm's market beta, B/P ratio, or total market capitalization. In addition, we find errors in consensus analyst earnings forecasts are predictable, and that the predictive power of V/P can be improved by incorporating these errors.
We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors’ implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S. tax regimes are associated with predictable differences in the magnitude of the implied tax discount for retained earnings, as are differences in dividend tax rates across Australia, Japan, France, Germany, and the United Kingdom.
International differences in the demand for accounting earnings affect properties of earnings that are predictable and observable. First, we show that earnings are more timely in incorporating value-relevant information in common-law countries (we study Australia, Canada, U.S. and UK) than in code-law countries (France, Germany, Japan). We attribute this to differences in solving information asymmetry under "shareholder" corporate governance (public disclosure) versus "stakeholder" governance (private communication), and to code-law's direct linkage of reported earnings to current payouts (to employees, managers, shareholders and governments). Second, earnings in most countries studied are conservative (tilted toward timely incorporation of bad news), due to information asymmetry. Third, common-law countries' earnings are more conservative, due to greater: (1) information asymmetry between managers and debt and equity investors; (2) regulation; and (3) expected cost of investor litigation. Fourth, UK earnings are the least conservative among common-law countries, due to private debt, and lower regulation and litigation costs. Fifth, tax laws, legal restrictions on undistributed earnings and code-law institutional links between earnings and dividends reduce the timeliness of earnings, relative to dividends. Sixth, earnings are more timely than cash flows in all countries studied. Seventh, the asymmetric timeliness of earnings has increased substantially over time in most countries. The results have implications for security analysts, accounting standard-setters, regulators, and corporate governance.
This study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management's
published cash flow projections. We estimate firm values using models that have been shown in other contexts to generate relatively
precise estimates of value. We find that these methods generally yield unbiased estimates of value, but the dispersion of
valuation errors is very wide - the sample ratio of estimated value to market value varies from less than 20% to greater than
250%. Cross-sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders'
incentives to overstate or understate the firm's value.
This article compares the market value of highly leveraged transactions to the discounted value of their corresponding cash flow forecasts. For the authors' sample of 51 highly leveraged transactions completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent on average of the market values of the completed transactions. Their valuations perform at least as well as valuation methods using comparable companies and transactions. The authors also invert their analysis by estimating the risk premia implied by transaction values and forecast cash flows and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios. Copyright 1995 by American Finance Association.
The use of accounting information in conjunction with comparable firm multiples is widely recommended for valuing initial public offerings (IPOs). We find that the price–earnings (P/E), market-to-book, and price-to-sales multiples of comparable firms have only modest predictive ability without further adjustments. This is largely due to the wide variation of these ratios for young firms within an industry. P/E multiples using forecasted earnings result in much more accurate valuations than multiples using trailing earnings.
A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
We compare dividend policies of U.S. and Japanese firms, partitioning the Japanese data into keiretsu, independent, and hybrid firms. We examine the correlation between dividend changes and stock returns, and the reluctance to change dividends. Results are consistent with the joint hypotheses that Japanese firms, particularly keiretsu-member firms, face less information asymmetry and fewer agency conflicts than U.S. firms, and that information asymmetries and/or agency conflicts affect dividend policy. Japanese firms experience smaller stock price reactions to dividend omissions and initiations, they are less reluctant to omit and cut dividends, and their dividends are more responsive to earnings changes. Copyright The American Finance Association 1998.
Faculty of Business, McMaster University. The author is indebted to Professors Harold Bierman, Jr., Thomas R. Dyckman, Roland E. Dukes, Seymour Smidt, Bernell K. Stone, all of Cornell University, and particularly to this Journal's referees, Nancy L. Jacob and Marshall E. Blume, for their very helpful comments and suggestions. Of course, any remaining errors are the author's responsibility. Research support from the Graduate School of Business and Public Administration, Cornell University is gratefully acknowledged.
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