Firm Value Estimates Research Articles

The Dynamics of Disagreement

Abstract In this paper, we infer how the estimates of firm value by “optimists” and “pessimists” evolve in response to information shocks. Specifically, we examine returns and disagreement measures for portfolios of short-sale-constrained stocks that have experienced large gains or large losses. Our analysis suggests the presence of two groups, one of which overreacts to new information and remains biased over about 5 years, and a second group, which underreacts and whose expectations are unbiased after about 1 year. Our results have implications for the belief dynamics that underlie the momentum and long-term reversal effect. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

A Life Cycle Model of Firm Value

ABSTRACT Most business valuation formulas are designed for profitable firms experiencing constant growth, even though in practice firms tend to transition from loss-making, high-growth startups to mature, stable enterprises. This paper introduces a life-cycle valuation model that accommodates this evolution in growth and profitability by treating investment expenditures and revenues as a function of firm age. The model's predictions regarding the time dynamics of common valuation multiples and financial ratios align well with observed financial data. The life cycle model can be estimated at the firm level from a few basic accounting variables and delivers estimates both of firm value and of the firm's cost of capital. Firm value estimates show a log-correlation with observed stock market values of more than 90 percent. JEL Classifications: D21; G12; G17; G31; G32.

Effects of integrating CSR information in financial reports on investors’ firm value estimates

AbstractUsing an experiment, we find that corporate social responsibility (CSR) performance measures have a greater impact on investors’ firm value estimates when reported in a separate report than when integrated into a financial report. We also find that more investors misclassified CSR information as assured when integrated into financial reports than when reported in separate reports. Investors who misclassified CSR information rated its credibility higher and derived higher firm value estimates compared to investors who correctly classified this information as non‐assured. Overall, our results identify potential costs of integrating CSR measures in financial reports, and inform global regulators considering alternative CSR reporting frameworks.

The Information Content of NAV Estimates

This paper investigates whether analysts’ estimates of firm fundamental value transmit unique information to security markets. Previous work has not studied analyst value estimates because of the scarcity of the release of such data. This study circumvents that limitation by considering the one type of firm for which a large sample of value estimates, known as the net asset value (NAV), exists: Real Estate Investment Trusts (REITs). Using a sample of 200 Equity REITs from 2001 to 2015, we document significant abnormal returns and share turnover on the announcement date of NAV revisions. This response is consistent with market reactions to announcements of other types of analysts’ estimates: earnings forecasts, price targets, and buy/sell recommendations. Our findings remain significant after controlling for these, suggesting the information contained in NAV revisions is incremental to that contained in other analyst estimates. Consistent with efficient information transmission, the market absorbs this new information quickly and completely.

Effect of Audit Quality on Non-Professional Investors Decisions: Experimental Evidence from Egypt

Purpose of this paper: The purpose of this paper is to investigate non-professional investors’ perceptions of audit quality proxied by audit firm size on their desirability to invest and their estimates of firm value. Design/methodology/approach: Two within-subjects experiments were designed to test non-professional investors’ perception regarding the impact of audit quality on their desirability to invest and their estimates of firm value in a single audit scenario and a joint audit scenario. Non-parametric statistical tests were used to test the research hypotheses. Findings: In a single audit scenario, investors perceive a superior quality for the audit services provided by a big 4 versus a non-big 4. In the case of a joint audit, the Accountability State Authority does not have the same superiority of audit quality versus a big 4 firm when it comes to Egyptian non-professional investors’ perception for the audit quality provided. Research limitations/implications: This paper uses postgraduate students that are registered in the financial accounting and auditing diploma in the faculty of commerce– Alexandria University as a proxy for non-professional investors. Real investors were difficult to recruit as subjects for the experiment conducted. Social and practical implications: The results of the study imply a lower non-professional investors’ perception for the quality of the audit services provided by the governmental body in Egypt, which is responsible for auditing all financial matters for governmental units. This result is alarming and needs immediate attention from the governmental bodies in Egypt. What is original/value of paper? This paper is the first to examine the impact of audit quality on nonprofessional investors’ desirability to invest and their estimates of firm value in Egypt. The paper focuses on the audit quality of the Accountability State Authority in comparison with that of the Big 4 firms, which was not examined before in Egypt. The paper contributes to the existing literature examining audit quality services in emerging markets.

Effects of Integrating CSR Information in Financial Reports on Investors’ Firm Value Estimates

Using an experiment, we find that corporate social responsibility (CSR) performance measures have a greater impact on investors’ firm value estimates when reported in a separate report than when integrated into a financial report. We also find that more investors misclassified CSR information as assured when integrated into financial reports than when reported in separate reports. Investors who misclassified CSR information rated its credibility higher and derived higher firm value estimates compared to investors who correctly classified this information as non-assured. Overall, our results identify potential costs of integrating CSR measures in financial reports, and inform global regulators considering alternative CSR reporting frameworks.

Research on the use of financial statement information for forecasting profitability

AbstractResearch on the use of financial statement information for forecasting profitability has two objectives: (i) to generate improved forecasts of profitability and accurate estimates of firm value; and (ii) to identify market inefficiencies with respect to financial statement information. For these areas of research, this article describes the evolution, provides examples and shares implications of the research. It also discusses opportunities for future research. The article highlights that financial statement analysis research has slowly evolved and has received limited attention from academics. The article argues that there are vast opportunities for impactful research on fundamental analysis and market inefficiencies.

Does CEO bias escalate repurchase activity?

Abstract We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.

The Misuse of Tobin's Q

We examine the common and growing misuse of Tobin’s q as a proxy for firm value within the law and finance literatures. We trace the history of Tobin’s q, beginning with its original role as a mean-reverting construct that macroeconomists used to model investment policy. We document how the original version of q morphed into the simplified market-to-book ratio version that law and finance scholars regularly use today to examine regulatory policy, corporate governance, and other economic phenomena. Whereas macroeconomists rejected this simplistic version of q because of measurement error problems, law and finance scholars embraced it as a proxy for firm value. In addition, we demonstrate empirically why the simplistic version of q is so problematic. Many of the problems arise because regressions that have as their dependent variable a ratio with book value in the denominator are likely to produce biased estimates, due to both omitted assets and time-varying, firm-specific characteristics that can systematically alter a firm’s book value. As a result, the simplistic version of q produces non-classical measurement error in regression specifications that seek to estimate the relationship between firm value and various corporate and regulatory phenomena. We also confirm, consistent with macroeconomists’ view of the original Tobin’s q, that the market-to-book estimate of q is mean-reverting in terms of stockholder returns. Finally, we suggest a new approach. We replicate the details of one leading study that was based on the simplistic version of q and then show how its results differ when we employ several alternative approaches. We propose that scholars should use these alternative approaches, including direct estimates of firm value instead of the simplistic market-to-book ratio, and, when possible, should supplement the popular fixed effects estimator with the first difference estimator. Overall, our message is straightforward: scholars should view with suspicion any assertions about corporate governance and regulation that are based on the use of market-to-book ratios as the dependent variable in regressions.

Significance of Forecast Precision: The Importance of Investors’ Expectations

AbstractI investigate whether the alignment between individual investors’ expectations about forecast precision and actual forecast precision affects their estimates of firm value, and whether this relationship is mediated by individual investors’ perceptions of management credibility and future firm growth. Experimental results confirm that when expected and actual forecast precision align, individual investors estimate higher firm stock prices than when expected and actual forecast precision do not align. I also provide evidence of a mediation path through which the misalignment between expected and actual forecast precision affects individual investors’ perceptions of management credibility, future firm growth, and estimates of firm stock price. My findings help reconcile inconsistencies in prior earnings forecast literature and inform managers and researchers about strategies that lead to higher perceptions of management credibility and firm value.

The Effect of Tax Expense Management and CSR Ratings on Investor Perceptions of Firm Value

Recent archival literature finds that investors positively value tax management activities that reduce taxes paid. Yet recent press suggests a negative backlash against companies that do not pay their “fair share” in taxes. Little empirical evidence exists regarding investor perceptions of tax management. We posit that corporate tax activities are related to corporate social responsibility (CSR) and may be a component of CSR. We predict the interaction of tax management and CSR performance influences investor pricing behavior. We examine the impact of effective tax rates (ETRs) and CSR ratings on participants’ choice of stock price and perceptions about CSR. We find, in the absence of any other CSR information or when a firm has poor CSR performance, investors perceive firms that pay more taxes as more socially responsible than firms that successfully manage taxes downward. However, when CSR performance is high, tax management does not influence perceptions about CSR. Also, investors do not always price according to their perceptions of CSR. Although investors may perceive firms that pay more taxes as more socially responsible, they do not differentially price firms for taxes paid (or tax management) when CSR performance is low. When CSR performance is high, investors reward the firms that most effectively manage taxes – not the firms that pay more. We only find a price premium for firms that have both good CSR ratings and effectively manage their taxes. Our results are consistent with an interactive effect of CSR performance and tax management on investor estimates of firm value.

Random Pricing Errors and Systematic Returns: The Flaw in Fundamental Prices

This paper examines the consequences of widespread and significant pricing errors. If market prices differ from intrinsic value but are unbiased estimates of it, certain systematic mispricing patterns will arise. To remove these phenomena, market prices need to adjust away from traditional fundamental estimates of firm value. Whether this outcome is achieved however is unclear. The adjustment process requires information that is not readily available. Further, it is likely associated with risks. Several well-known and some less well-known empirical phenomena related to return predictability are compatible with the view that adjustments have historically been incomplete.

Negative Value Indicators in Relative Valuation – An Empirical Perspective

This study investigates whether firms with negative value indicators (e.g. negative EBIT) should be excluded from peer groups in relative valuation. While this approach is chosen in many empirical studies and recommended by practitioners, valuation textbooks suggest including firms with negative value indicators in the peer groups. Evidence regarding which alternative leads to more accurate firm value estimates is missing. We conduct an empirical study using a sample from the S&P Composite 1,500 Index for the period 1994–2010 to answer this question. We find that, contrary to textbook recommendations, eliminating firms with negative value indicators generally leads to more accurate firm value estimates.

CEO Overconfidence, Repurchase Decisions, Dividend-Repurchase Substitution, and the Market Reaction to Repurchases

We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.

Estimating cost of capital in firm valuations with arithmetic or geometric mean – or better use the Cooper estimator?

We test the extent and determinants of bias effects of the arithmetic as well as the geometric mean estimator and the estimator of Cooper [1996. Arithmetic versus geometric mean estimators: Setting discount rates for capital budgeting. European Financial Management 2 (July): 157–67] regarding discount rate estimation for firm valuation by way of a bootstrap approach for 13 different countries. The Cooper estimator is superior to both the geometric and the (conventional) arithmetic mean estimator. However, a ‘truncated’ version of the arithmetic mean estimator leads generally to better estimation outcomes than the Cooper estimator. This means that, in order to reduce problems of upward-biased firm value estimates, expected cash flows beyond a certain time horizon are completely neglected in terminal value estimation. Such an approach seems particularly reasonable for the valuation of young growth companies as well as for companies from quickly developing countries such as Brazil, China, or Thailand, because the bias in terminal value estimation is increasing in the growth rate of future expected cash flows.

Reading between the lines: An empirical examination of qualitative attributes of financial analysts’ reports

This paper examines whether two qualitative attributes of financial analysts’ reports, detail and tone, are significant in explaining how the market responds to analysts’ reports, after controlling for the information contained in the reports’ quantitative summary measures. Report detail is hypothesized to reflect the level of effort expended by the analyst in preparing the report, and therefore the usefulness of their intrinsic firm value estimates. Report tone is predicted to signal the analyst’s underlying sentiment regarding the firm and may be used to assess the extent to which analysts’ conflicts of interest interfere with the mapping of firm value estimates into stock recommendations. Consistent with these hypotheses, we find that the tone of financial analyst reports contain significant information content incremental to the reports’ earnings forecasts and recommendations, and report complexity (one component of report detail) helps explain cross-sectional variation in the market’s response to the reports’ recommendations.

Significance of Forecast Precision: The Importance of Ex-Ante Expectations

I investigate whether alignment between individual investors’ expectations about forecast precision and actual forecast precision affects their estimates of firm value, and whether this relationship is mediated by individual investors’ perceptions of management credibility and future firm growth. Experimental results confirm that when expected and actual forecast precision align, individual investors estimate higher firm stock prices than when expected and actual forecast precision do not align. I also provide evidence of a mediation path through which the misalignment between expected and actual forecast precision affects individual investors’ perceptions of management credibility, future firm growth, and estimates of firm stock price. My findings help reconcile inconsistencies in prior earnings forecast literature and inform managers and researchers about strategies that lead to higher perceptions of management credibility and firm value.

The Implementation And Application Of Firm Valuation Models

<span style="font-family: "Times New Roman","serif"; font-size: 10pt; mso-fareast-font-family: 'Times New Roman'; mso-fareast-language: EN-US; mso-ansi-language: DA; mso-bidi-language: AR-SA;" lang="DA">This study focuses on methodological errors that arise when firm valuation is carried out in practice. Violation of assumptions underlying the valuation models are examples of methodological errors. We analyze valuation spreadsheets from five Danish financial institutions (i.e., stockbrokers and corporate finance departments) in order to trace if firm valuation models are properly applied. We conclude the following: (i) Methodological errors often cause valuation models to generate estimates that differ significantly from the theoretically correct value; and (ii) Firm value estimates were biased due to a variety of methodological errors. The implications of those errors may be significant. Investors are exposed to poor recommendations. Financial institutions such as investment bankers and stockbrokers may be exposed to bad reputation and lawsuits. Accounting firms that do not carry out firm valuation correctly (for example in testing goodwill for impairment) also run the risk of litigations.</span><p> </p>

Pengaruh Luas Pengungkapan Csr Terhadap Earning Response Coefficient Pada Industri High Profile Yang Terdaftar Di Pasar Modal

AbstractThe study hypothesized that CSR disclosure strengthen the association between unexpected earning and abnormal return (ERC), since CSR disclosure provide more information to interpreting accounting earning. The sample of the study is annual report 2006 of the companies listed at the Indonesian Stock Exchange, and the company is the high profile industry. This finding raises the question of whether CSR information in annual report contain value-relevant about accounting earning or if investor are simply not capable of incorporating CSR information in the firm value estimates.

The persistence of green goodwill

Civil coercion has its limitations, government regulation is only as effective as enforcement and investors base their estimates of firm value on information available from the firms themselves and from other sources. While voluntary disclosure is construed as being selective or incomplete, negative non-financial news such as details of fines imposed for environmental violation is reflected in lower stock prices for a short duration. This paper evaluates the persistence of goodwill capital for a sample of Indian companies from select industries, graded by their environmental performance. We conclude that investor concern differs across industries and that the correlation of environmental performance with firm valuation is, at best, weak and short-lived. Periodic scrutiny and announcement of industry environmental performance by appropriately equipped independent agencies could help coordinate and sustain stake-holder pressure on industry.