Changes In Market Value Research Articles

Simplification of equity capital structure and market value

Since the new Swiss Stock Corporation Law came into effect in 1992, most listed Swiss companies have reduced the number of share classes outstanding by exchanging some classes for an already existing one. Overall, the simplifications have had no significant influence on market capitalisation. However, this can be explained by two compensating effects. Firstly, holders of nonvoting participation certificates (PC) achieve considerable gains, whereas the larger group of shareholders suffer minor losses. Secondly, the change in market value is dependent on the change in the bid-ask spread. The more liquidity is improved, the more share prices increase. For the in-crease in market capitalisation to be statistically significant, the reduction in the bid-ask spread must be not only statistically significant but also reach around 0.5 percentage points.

Excess Returns of Industrial Stocks and the Real Estate Factor

1. Introduction For more than three decades, numerous studies have been devoted to capital asset pricing issues. Identifying key factors influencing returns on capital assets remains the major focus of the studies. According to the first important asset pricing theory, the capital asset pricing model (CAPM) of Sharpe (1964) and Lintner (1965), there is a positive linear relationship between expected stock returns and market betas. This single-factor model is theoretically challenged by the arbitrage pricing theory (APT) developed by Ross (1976). The APT provides a theoretical framework to identify more macro factors that have significant explanatory power for stock returns (Roll and Ross 1980; Chen 1983; Bower, Bower, and Logue 1984; and Chen, Roll, and Ross 1986). In order to be included in a multifactor model, a factor must represent a source of nondiversifiable or systematic risk. In addition to theoretical challenges, the evidence of many empirical studies casts doubts on the adequacy of the long-existing CAPM. For example, the findings of Fama and French (1996) suggest that Ps alone cannot explain expected returns on common stocks. Meantime, other macro factors related to the bond market, such as unanticipated changes in the term structure (Chen, Roll, and Ross 1986), are used to explain stock returns. In recent years, more risk factors have been suggested in the literature. For example, in their time-series study about common risk factors in the returns on common stocks, Fama and French (1993) argue that there are three stock market factors, an overall market factor, a size factor (stock price times number of shares), and a book-to-market equity factor, that have a significant impact on stock returns. In addition, two bond market factors, the term structure and risk factors, can capture common variation in stock and bond returns (Fama and French 1993). Similar to Fama and French's (1993) multifactor models, the present study uses all three stock market factors (an overall stock market factor, a size factor, and a book-to-market equity factor), two bond market factors related to maturity and default risks, and a real estate market factor. The reason for introducing a new risk factor, real estate market factor, although not so obvious, is engendered by the theoretical spirit of the APT Real estate is a major asset class, and as almost all firms have operating expenses under this category, it does not matter if the properties are acquired or rented. According to Zeckhauser and Silverman (1983), a significant portion of corporate assets, on average as high as 25%, is real estate related. Changes in real estate market value, therefore, potentially have a direct impact on the value of corporate assets and operating expenditures. If this impact is significant, as are other systematic risk factors, the real estate market factor must play an important role in stock pricing. In addition, the real estate market risk is a macro factor. Therefore, results about this factor do not have any interpretation problems that are associated with firm-specific variables. In order to identify significant factors in explaining returns for industrial stocks, this study estimates various models based on the following six risk factors: an overall stock market factor, a size factor, a book-to-market equity factor, a term structure factor, a default risk factor, and an unsecuritized real estate market factor. Results of this study provide some empirical evidence about the significance of the six risk factors on excess returns for industrial stocks. In addition, this study also investigates how the inclusion of additional risk factors, for example, the inclusion of the bond market factors or the real estate market factor in the single market-factor model, increases the explanatory power of the model. The remainder of this study is organized as follows. Section 2 describes the data and methodology; section 3 presents the empirical results; and section 4 contains the conclusions. …

Industrial Research Institute's R&D Trends Forecast for 2001

While shifting their emphasis to growth through new businesses and partnerships, most IRI members are maintaining their RD it placed "Managing R&D for Business Growth" as the top issue for 2000 (see RTM Sept.-Oct. 2000, pp. 15-16). The IRI membership is well represented by the chemical and process industries, and we could speculate that following a decade of R&D downsizing, restructuring and process implementation (e.g., Stage Gate), all of which has not seemed to bring major changes in market value to the chemical industry, there is now renewed emphasis on maximizing value generation from R&D expenditures and aligning R&D for growth. 2. R&D continues to be tightly targeted for tangible business results: * Less participation in Pre-Competitive Consortia (Q9). * Fewer contacts with Federal Labs (Q10). * Less planned increases in Support of Existing Businesses (Q3a). This set of trends, indicating the tendency to be more collaborative, highlights the need for new models of interaction with universities and government laboratories. …

Assessing the Market Value of Sponsoring: Corporate Olympic Sponsorships

<h3>ABSTRACT</h3> The difficulties of evaluating sports sponsorship are well known. In this study Miyazaki and Morgan use ‘event study analysis’ to assess corporate sponsorship of the 1996 Olympic Games. The theory, well known in financial circles, is that consequences of an activity are reflected in the market price of the sponsor9s stock. The authors examine the changes in company market value (share price) following the announcement of Olympic Sponsorship, and conclude that this type of activity was of positive value to participating companies.

EVA AND THE "NEW ECONOMY"

Some have observed that the new economy means the end of the EVA performance measurement and incentive compensation system. They claim that although the EVA system is useful for oldline companies with heavy investments in fixed assets, the efficient management of investor capital is no longer an imperative for newage firms that operate largely without buildings and machinery–and, in some cases, with negative working capital. This article argues that EVA is not only suitable for the emerging companies that lead the new economy, but even more important for such firms than for their “rust belt” predecessors. While there may be a new economy in terms of trade in new products and services, there is no new economics– the principles of economic valuation remain the same. As in the past, companies will create value in the future only insofar as they promise to produce returns on investor capital that exceed the cost of capital. It has made for sensational journalism to speak of companies with high valuations and no earnings, but this is in large part the result of an accounting framework that is systematically flawed. New economy companies spend much of their capital on R&D, marketing, and advertising. By treating these outlays as expenses against current profits, GAAP accounting presents a grossly distorted picture of both current and future profitability. By contrast, an EVA system capitalizes such investments and amortizes them over their expected useful life. For new economy companies, the effect of such adjustments on profitability can be significant. For example, in applying EVA accounting to Real Networks, Inc., the author shows that although the company reported increasing losses in recent years, its EVA has been steadily rising–a pattern of profitability that corresponds much more directly to the change in the company's market value over the same period. Thus, for stock analysts that follow new economy companies, the use of EVA will get you closer to current market values than GAAP accounting. And for companies intent on ensuring the right level of investment in intangibles– neither too much nor too little– EVA is likely to send the right message to managers and employees. The recent decline in the Nasdaq suggests that stock market investors are starting to look for the kind of capital efficiency encouraged by an EVA system.

Stock Market Wealth and Consumption

This paper explores the link between changes in the aggregate value of corporate stock and changes in consumer spending. It presents data on the distribution of corporate stock ownership based on the 1998 Survey of Consumer Finances. It also uses time-series evidence on the comovement of stock market wealth and various categories of consumer spending to calibrate “the wealth effect.” It concludes that in the year after a change in stock market values, consumer spending is likely to rise by between one and two cents for each dollar increase in the value of corporate stock.

The effect of international institutional factors on properties of accounting earnings

International differences in the demand for accounting income predictably affect the way it incorporates economic income (change in market value) over time. We characterize the `shareholder’ and `stakeholder’ corporate governance models of common and code law countries respectively as resolving information asymmetry by public disclosure and private communication. Also, code law directly links accounting income to current payouts (to employees, managers, shareholders and governments). Consequently, code law accounting income is less timely, particularly in incorporating economic losses. Regulation, taxation and litigation cause variation among common law countries. The results have implications for security analysts, standard-setters, regulators, and corporate governance.

What Value Analysts?

We evaluate the contribution of analysts' earnings forecasts to investors' decisions by comparing the association between annual excess returns and a broad set of information items derived from financial statements with the association between excess returns and that information set plus the present value of five-year ahead analysts' earnings forecasts. We thus bring to a sharp focus the incremental contribution (over financial statement information) of the major product of analysts - near and medium-term earnings forecasts - to investors' decisions as reflected by annual excess returns. Large differences in explanatory power between the regressions with and without analysts' forecasts are evidence in favor of analysts' contribution to investors' decisions. However, in assessing analysts' contribution from associations with stock returns care should be taken to account for the inherent simultaneity - analysts not only contribute (possibly) to investors, they also observe stock price behavior and learn from investors' decisions. We are therefore using a system of simultaneous equations to control for the endogeneity of both excess returns and analysts' forecasts, allowing us to isolate the net contribution of analysts' forecasts to capital markets. Our findings, based on cross-sectional regressions covering the period 1982-1997, indicate that over the sample period, analysts add a hefty 40 percent (in Adj-R2 terms) to the explanatory power of financial information with respect to stock returns. However, when simultaneity (i.e., analysts' learning from returns) is accounted for, their contribution is estimated as a modest 12 percent. This result suggests that analysts' mostly react to changes in market values rather than cause them. Additional findings are: (1) The explanatory power of the broad-based financial statement information set decreased significantly over the examined period, while the explanatory power of the model including analysts' forecasts decreased at a lower rate. Analysts, therefore, mitigate to some extent the decrease in the informativeness of financial statements. (2) The incremental contribution of analysts in firms that report losses is substantially larger than in profitable companies. (3) The incremental contribution of financial analysts is largest in high-tech industries followed by low-tech industries, and regulated firms, suggesting that the contribution of analysts is larger in sectors where the informativeness of financial reports is low. (4) Analysts' contribution to valuation in firms with substantial research and development (R&D) capital is relatively larger than in firms without such R&D capital. (5) The incremental contribution of analysts during economic boom periods is higher than during recessions (e.g., the early 1990s). (6) Based on a firm-specific measure of analysts' incremental contribution, we find that this contribution decreases with firm size, systematic risk, and earnings persistence, and increases with the firm's R&D capital. All in all, we find the direct contribution of analysts' forecasts of earnings to investors' decision to be quite modest. However, this contribution is substantial in firms, sectors and circumstances where the informativeness of financial statements is relatively low.

Value Maximization, Stakeholder Theory, and the Corporate Objective Function

This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of managers and directors. I argue that since it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities and monopoly (and when all goods are priced), social welfare is maximized when each firm in an economy maximizes its total market value. Total value is not just the value of the equity but also includes the market values of all other financial claims including debt, preferred stock, and warrants. In sharp contrast stakeholder theory, argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm (including not only financial claimants, but also employees, customers, communities, governmental officials, and under some interpretations the environment, terrorists, and blackmailers). Because the advocates of stakeholder theory refuse to specify how to make the necessary tradeoffs among these competing interests they leave managers with a theory that makes it impossible for them to make purposeful decisions. With no way to keep score, stakeholder theory makes managers unaccountable for their actions. It seems clear that such a theory can be attractive to the self-interest of managers and directors. Creating value takes more than acceptance of value maximization as the organizational objective. As a statement of corporate purpose or vision, value maximization is not likely to tap into the energy and enthusiasm of employees and managers to create value. Seen in this light, change in long-term market value becomes the scorecard that managers, directors, and others use to assess success or failure of the organization. The choice of value maximization as the corporate scorecard must be complemented by a corporate vision, strategy and tactics that unite participants in the organization in its struggle for dominance in its competitive arena. A firm cannot maximize value if it ignores the interest of its stakeholders. I offer a proposal to clarify what I believe is the proper relation between value maximization and stakeholder theory. I call it enlightened value maximization, and it is identical to what I call enlightened stakeholder theory. Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the long run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders. Managers, directors, strategists, and management scientists can benefit from enlightened stakeholder theory. Enlightened stakeholder theory specifies long-term value maximization or value seeking as the firm’s objective and therefore solves the problems that arise from the multiple objectives that accompany traditional stakeholder theory. I also discuss the Balanced Scorecard, the managerial equivalent of stakeholder theory. The same conclusions hold. Balanced Scorecard theory is flawed because it presents managers with a scorecard which gives no score--that is, no single-valued measure of how they have performed. Thus managers evaluated with such a system (which can easily have two dozen measures and provides no information on the tradeoffs between them) have no way to make principled or purposeful decisions. The solution is to define a true (single dimensional) score for measuring performance for the organization or division (and it must be consistent with the organization's strategy). Given this we then encourage managers to use measures of the drivers of performance to understand better how to maximize their score. And as long as their score is defined properly, (and for lower levels in the organization it will generally not be value) this will enhance their contribution to the firm.

State-Dependent Volatility and the Market Risk Premium

The market risk premium is estimated based on the equilibrium relationship between risk and expected returns in an intertemporal setting characterized by periods of distinctly different levels of risk. In this environment of discrete volatility states, expected returns compensate investors for current volatility risk as well as the risk associated with a change in the level of market volatility. More importantly, expected returns include the expected change in market value associated with a change in the level of market risk. For this reason, average realized returns within each volatility state do not reflect the risk premium required by investors for state specific risk. By explicitly modelling the process governing the evolution of volatility states, I recover the required risk premium for each volatility state. The dynamic nature of the volatility process implies a term structure of expected forward risk premia that is dependent upon the current level of market volatility. During the period from 1926 to 1997, my estimates indicate that the economy is likely to have been in the high-volatility state approximately 13 percent of the time and that there is a strong statistical relationship between these high-volatility episodes and business cycle contraction periods. In addition, I find evidence of a structural shift in the volatilty process corresponding to the end of the Great Depression Era. As a result of this structural change, the likelihood of being in the high-volatility state decreases dramatically after 1940, implying a significant decrease in the level of market risk. Consistent with this reduction in risk, I find evidence of an abnormal increase in market values during the period from 1940 to 1960. After controlling for this windfall capital gain, my analysis suggests that the long-run market risk premium for the period after 1940 is substantially less than that implied by the simple historical average of excess market returns.

International Differences in the Timeliness, Conservatism, and Classification of Earnings

In this paper, we analyze differences in the timeliness of income recognition between the U.S. and U.K. GAAP financial reporting regimes. Building on previous work in the area we focus on the links between current reported earnings and current and past changes in market value. In the light of Basu [1997] we present a formal model in which the response of reported earnings to changes in market value varies according to whether the value change is good news or bad. This model yields a number of insights with regard to the definition and measurement of earnings conservatism. We also report evidence indicating that controlling for cross-jurisdictional classification differences affects comparisons of earnings timeliness and earnings conservatism; specifically, we find that apparent differences in conservatism between the U.S. and U.K. accounting regimes are sensitive to the inclusion or exclusion of extraordinary items in U.K. accounting earnings. Recent research documents significant variation in the information content of earnings across international GAAP regimes (e.g., Alford et al. tLancaster University; tUniversity of Manchester. The research support of the Eco

The Effect of International Institutional Factors on Properties of Accounting Earnings

International differences in the demand for accounting income predictably affect the way it incorporates economic income (dividend-adjusted change in market value) over time. We characterize the shareholder and stakeholder corporate governance models of common and code law countries respectively as resolving information asymmetry by public disclosure and private communication. Also, code law directly links accounting income to current payouts (to employees, managers, shareholders and governments). Consequently, code law accounting income is less timely, particularly in incorporating economic losses. Regulation, taxation and litigation cause variation among common law countries. The results have implications for security analysts, standard-setters, regulators, and corporate governance.

The Impact of Reserve Prices in Sealed Bid Federal Timber Sale Auctions

Abstract In this article we examine the impact of reserve prices on timber revenues from federal timber sale auctions in North Carolina from a game-theoretic perspective by recognizing the effect of competition on optimal bid strategies. The empirical model endogenizes the number of bidders in a simultaneous-equations Tobit framework, and estimates the impacts of the reserve price on the probability that an offering will sell, as well as on the sale price given that the offering is sold, in the presence of strategic bidding behavior. Model results support the underlying game-theoretic structure. The number of bidders and the reserve price are both important in determining market value or high bid. Using a Wu-Hausman test, we reject exogeneity in the number of bidders. Importantly, a calculation of the change in market value given a change in the reserve price shows that increasing reserve prices will likely increase timber revenues on sales in North Carolina, thus providing evidence that reserve prices are not optimal. However, increasing the reserve price will decrease the proportion of sold sales which may not support nontimber objectives of the Forest Service. For. Sci. 44(4):485-495.

Creating barriers for foreign competitors: a study of the impact of anti-dumping actions on the performance of U.S. firms

This study investigates whether anti-dumping statutes are effective at improving the performance of U.S. firms. As international trade grows and competitors increasingly cross national borders to enter new markets, U.S. trade law becomes a potentially important tool for managers as they consider how to create barriers for foreign competitors. The results of this study suggest that the anti-dumping laws significantly increase returns of U.S. firms that pursue anti-dumping protection. The average petitioner between 1980 and 1992 received a $46 million increase in market value as a result of filing an anti-dumping petition. However, no significant change in market value was associated with preliminary or final determinations of the International Trade Commission, except when petitions received a negative determination at the final stage of the process. A negative determination at the final stage of the process resulted in a loss of market value. © 1998 John Wiley & Sons, Ltd.

Delays in New Product Introductions and the Market Value of the Firm: The Consequences of Being Late to the Market

This paper empirically estimates the impact of not meeting promised new product introduction dates on the market value of the firm. We estimate the average “abnormal” change in the market value for a sample of 101 firms around the date when information about delaying the introduction of new products is publicly announced. On average, delay announcements decrease the market value of the firm by 5.25%. The average dollar change in the market value in 1991 dollars is $−119.3 million. The evidence suggests that there are significant penalties for not introducing new products on time. To provide further insight, regression analyses are used to identify factors that influence the direction and magnitude of the change in market value. We find that the competitiveness of the industry in which the firm operates, the size of the firm, and the firm's degree of diversification are statistically significant predictors for the change in the market value of firms that announce delays in the introduction of new products.

The present value model with time-varying discount rates: Implications for commercial property valuation and investment decisions

A vector autoregressive model is developed for predicting cash flow and returns in the private (unsecuritized) commercial property markets. The model predicts both of these variables quite well during the sample period. The forecasting model is then used to develop a simple “buy/sell” rule for identifying property market value peaks aud troughs. An improved present value model, taking account of the predictability of property returns, is described and found to track historical market values much more closely than does either the appraisal-based index or the traditional present value model with constant expected returns. Analysis in this paper suggests that most of the change in commercial property market values has been due to changes in expected returns, rather than to changes in expected future operating cash flows. Key Wordsr valuation, investment, present value model, timing, cycles, discount rates The present value model underlies all of modern financial economics, and lies at the heart of commercial property valuation and real estate investment decision making. Traditionally this model is applied by forecasting property net cash flows and discounting those cash flows at a constant discount rate. In this model the discount rate is meant to represent the expected return (that is, the internal rate of return or total return) to an investment in the property, thereby reflecting the opportunity cost of capital. In practice, the discount rate used in the present value model as applied to property valuation has not changed much over time, largely because analysts have not known how to quantify changes in the market’s expected return on pr0perty.i Recently, evidence has mounted that asset value changes in the securities markets are not consistent with the constant discount rate model or the constant expected return assumption? Campbell and Mei (1993), among others, have found that changes in stock prices over time are due more to changes in the market’s required total returns (including price changes), than to changes in the market’s cash flow expectations.3 Furthermore, changes in the market’s expected return can be forecasted to some extent, as has been demonstrated by Liu and Mei (1992, 1994) in the case of REITs, small stocks, and large stocks. This implies that asset price changes are more predictable than was previously thought, and that turning points in asset price cycles may be somewhat identifiable in advance!

Profiting from Induced Changes in Competitors' Market Values: The Case of Entry and Entry Deterrence

The authors resurrects an idea due to J. Hirshleifer (1971) by examining how one firm might profit by trading in the securities of other firms whose values are dependent upon the first firm's actions. They focus on the case of entry: can an entrant profit from trading in the securities of an incumbent firm and how does the availability of such trading profits affect the economics of entry and entry deterrence? The authors' results have implications for antitrust policy, insider trading rules, the Williams Act, short selling rules, whether companies should be publicly or privately held, and the degree of diversification for companies. Copyright 1995 by Blackwell Publishing Ltd.

A Model of Accrual Measurement with Implications for the Evolution of the Book-to-Market Ratio

This paper constructs a model of accrual measurement and tests its implications for the evolution of the book-to-market ratio. The model captures the intuition that book value is untimely or smoothed relative to market value, so that movements in market value have relatively high variance and low predictability, compared with movements in book value. Empirical tests of the model use lagged market value changes to forecast the mean reversion of the book-to-market ratio. This paper complements recent research investigating the role of book-to-market ratios in security analysis. Accounting theorists (e.g., Edwards and Bell [1961] and Feltham and Ohlson [1995]) have long recognized the critical role of book-to-market ratios as predictors of abnormal earnings in earnings-based valuation models. Tests of such valuation models (e.g., Ou and Penman [1993]) confront the practical problem of determining the horizon beyond which abnormal earnings are expected to be zero. The model in this paper implies that this horizon is determined by the remaining useful life of assets, and that the expected path of abnormal earnings over this horizon reflects the pattern of expiration of the useful lives of assets in place.

Accounting Fundamentals of the Book-to-Market Ratio

The book-to-market ratio is a function of current and lagged changes in market value. The coefficients of correlations between book and market values decline smoothly toward zero as the lag increases. The magnitude and length of the lags are greater, the longer-lived a firm's assets. To understand current book-to-market ratios, one must consider movements in the market value of common equity over the past six years. In other words, market values of common equity lead the book value of common equity by as much as six years. This is striking evidence of the timeliness (or lack thereof) of book values based on historical cost accounting.

Factors Affecting Price Earnings Ratios and Market Values of Japanese Firms

This paper investigates cross-sectional explanations of Japanese PE ratios by focusing on two dependent variables, the percentage change in the PE ratio (PE) and the percentage change in the market value of equity (MV). Results of this study suggest that changes in the value of hidden assets such as land, changes in the patterns of ownership by Japanese individuals, and foreign investors, changes in expected earnings growth and earnings risk, and changes in dividends per share and dividend payout are significantly related to changes in PE ratios and market values. Our results, therefore, support the contention of French and Poterba that changes in land values appear to explain at least a portion of changes in Japanese PE ratios.