Higher Valuation Research Articles

Corporate transparency among government suppliers: Implications for firm valuation

AbstractCorporate transparency has a positive impact on firm valuation, as predicted by agency theory; however, the transparency of strategically important government suppliers is not rewarded with higher valuations as the market expects politically sensitive firms to be inherently more transparent. The association between transparency and valuation among politically sensitive firms is consistent with the political cost hypothesis. We address endogeneity concerns using propensity score matching, Heckman's self‐selection models and entropy balancing. Our findings offer novel insights, suggesting that the influence of transparency on corporate valuation varies with political sensitivity – a significant consideration for both finance professionals and scholars.

Corporate investment sensitivity to equity market misvaluation

PurposeThe purpose of this paper is to investigate the effect of equity market misvaluation on manager behavior. Using a sample of 535 French-listed over 2000–2018, the authors analyze whether corporate investment decision is sensitive to equity market overvaluation.Design/methodology/approachThe study adopts market-to-book (M/B) decomposition developed by Rhodes-Kropf and Viswanathan (2004, RKV) that proxies for market misvaluation at the firm and industry levels. The authors conducted a long-term performance analysis via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors tested the relationship between equity misvaluation, corporate investment decisions and equity issuance. The authors ran several robustness tests.FindingsThe empirical results show that equity market misvaluation affects corporate investment positively as the stock price deviates further away from its fundamental. Based on market timing theory, the authors find that corporate investment occurs in periods of high valuation motivated by equity issuance to benefit from the low cost of capital. This effect is more prominent for financially constrained firms. Consistent with the catering channel, the authors find that the misvaluation-investment nexus is more pronounced in firms with short-horizon investors. By examining the stocks’ long-term performance of misvalued firms, via a sorting portfolio procedure, the authors find that undervalued firms outperform and generate higher abnormal returns (Jensen’s alpha) than overvalued firms, suggesting that mispricing-driven investment appear to be short-lived and lead to lower return in the long term.Practical implicationsCorporate decision-makers and governance structures should pay attention to the rationality of the corporate investment decision in the context of equity market misvaluation. Managers who focus on maximizing the stock market value in the short-run at the expense of its long-term performance must give preference to value-creating investment, not driven by an external mechanism such as equity market mispricing. More generally, investors and portfolio managers must take into account the market mispricing process in decision-making. Nonetheless, from the portfolio sorting perspective, decision-makers must act in terms of high governance quality to mitigate suboptimal investment due to stock market mispricing (Jensen, 2005). Finally, equity market overvaluation, leading managers to invest via equity financing in particular, should be a signal to attract investors’ attention to seize the window of opportunity and embark on a short-term portfolio strategy. Such a strategy promises high returns in the short term.Originality/valueThis paper investigates jointly two theoretical channels: equity market timing and catering. The authors propose for the analysis three components of the M/B decomposition to dissociate market misvaluation at the firm and industry level from the fundamental component of market value (growth). This procedure provides a better understanding of the role of firm and industry misvaluation in explaining corporate investments. The authors provide evidence of the equity market misvaluation via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors examine the effect of misvaluation on both the investment and the financing decisions.

The relative valuation of cash flow and current accruals affected by their extremity

PurposeRecent studies on the securities market’s differential pricing of earnings components have shown that cash flow from operations is more highly valued than total accruals and that moderate cash flow from operations has higher valuation than extreme total accruals. An interesting question that follows is whether these findings hold regarding the differential valuations of cash flow and current accruals. This study aims to extend prior research by addressing this issue in two ways. First, the authors examine the incremental information content of cash flow from operations beyond working capital from operations. Second, the authors assess the effect of extreme working capital from operations on the incremental information content of cash flow from operations. This study aims to extend prior research by addressing this issue in two ways.Design/methodology/approachThis study adopts market-based accounting research to test its hypotheses and to achieve its objectives. Specifically, this study uses statistical associations between accounting data and stock returns to examine the incremental information content (value relevance) of cash flow and working capital from operations and the effect of extreme working capital from operations on the incremental information content of cash flow.FindingsThe results show that cash flow from operations is not more highly valued than current accruals (both being valued equivalently). However, moderate cash flow from operations has higher valuation than extreme current accruals (each is valued differently). Overall, these research findings indicate that cash flow becomes more important for valuation as accruals get “extreme”.Practical implicationsAs accruals are unlikely to persist to be permanent across the years, these results can be interpreted as indicating that cash flow and accruals information are used jointly by investors, with one being more important than the other depending on the relative “extremeness” of each. Therefore, both are of value to the investor and both should be reported.Originality/valueThe paper contributes to the UK research on determining the preferred level of disaggregation of earnings components, i.e. operating cash flow, current accruals and non-current accruals. This would help investors to improve their investment and credit decisions.

Scalability, venture capital availability, and unicorns: Evidence from the valuation and timing of IPOs

The growing phenomenon of highly valued startups (e.g., unicorns) poses fundamental questions for entrepreneurship research. We posit that venture scalability and VC funding availability may explain startups' IPO valuations (and timing). Highly scalable ventures may not only capture very large market opportunities, but their scaling strategies may also be constrained by the governance and regulatory burdens faced by public firms. Accordingly, we hypothesize and find that more scalable ventures undertake IPOs at higher valuations, which is positively moderated by VC funding availability. Highly scalable startups also delay their IPOs for longer but only when VC funding availability is high.

Reaching for Yield and the Cross Section of Bond Returns

Reaching for yield, which we define as an investor preference for higher-yield bonds at a given rating or for higher-rated bonds at given yields, is associated with inflated valuation and thus negatively predicts risk-adjusted returns. Controlling for ratings, alphas are lower for higher-yield bonds, whereas, controlling for yields, alphas are lower for safer-looking, higher-rated bonds. Future bond returns are particularly low when current interest rates are low and demand from yield-reaching investors increases. These bonds experience more frequent downgrades and defaults, suggesting that they are riskier despite their high valuation. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The e-companion and data are available at https://doi.org/10.1287/mnsc.2023.4920 .

Static Pricing for Multi-unit Prophet Inequalities

Characterizing the Efficiency of Static Pricing Schemes as a Function of the Supply The problem of selling a supply of k units to a stream of customers constitutes one of the cornerstones in revenue management. Static pricing schemes (that output the same price to all customers) are commonly used because of their simplicity and their many desirable properties; they are anonymous, nonadaptive, and order oblivious. Although the efficiency of those schemes should improve as the supply k increases, prior work has only focused either on algorithms that aim for a constant approximation that is independent of k or on the setting where k becomes really large. In contrast, this paper characterizes the efficiency of static pricing schemes as a function of the supply. Our approach stems from identifying a “sweet spot” between selling enough items and obtaining enough utility from customers with high valuations. Subsequent work shows that our pricing scheme is the optimal static pricing for every value of k.

Paytm Ipo : Unravelling The Behemoths Downfall

adhur Deora, the Group Chief Financial Officer at Paytm's parent company, One 97 Communications, made a striking statement, "A higher valuation could have been achieved but we decided to price it at a level where everyone makes money." Paytm had embarked on an ambitious journey to raise over ₹18,000 crores ($2.2 billion) through its initial public offering (IPO) filed in July 2021. This IPO marked a significant moment in the stock market, drawing global investors' attention. Notably, it stands as the largest IPO in the history of India, surpassing Coal India's previous record of ₹15,000 crores.

How to improve quality investing

In this article, we evaluate the relationship between quality investing combined with Economic Moat, ESG (Environmental, Social and Governance) and analyst opinions over the period 2014–2020 based on a data set comprising 803 US stocks. Performance is evaluated using several metrics (returns and alphas). Our results show that quality stocks measured by return on invested capital (ROIC) exhibit superior performance. The incorporation of competitive advantages allows a better discrimination among the classic high-quality strategies. Investment in stocks with quality and high ESG entails the payment of a premium but buying quality companies with Economic Moat makes up for this negative aspect. The results show how quality companies that have competitive advantages obtain a better future performance and are recognized by the market with a higher valuation. However, the markets may take time to recognize this value since the incorporation of the average Price-to-Price target (Analyst consensus) increases the future performance. JEL classification: G11; G14; G23

Maintenance and enhancement of forest ecosystem services: a non-industrial private forest owner perspective

The transition to a fossil-free society in Sweden is expected to cause an increased demand for forest-derived products which may intensify existing conflicts between forest ecosystem services. This study investigated the preferences among non-industrial private forest owners for maintaining multiple forest ecosystem services and their preferences for future forest development. The findings were related to their prioritizations for and knowledge of forest management. The study results were generated through the means of a survey which revealed a consistent high valuation among all respondents of ecosystem services relating to water quality, timber quality, recreation, and biodiversity. A majority of the respondents desired increasing proportions of mixed species and broadleaved stands within the future forest landscape. Certified forest owners who were members of a forest owner association (CMs) prioritized achieving high economic income through roundwood production with strong preferences for the ecosystem services high stand growth and high timber quality. For CMs, carbon substitution was the preferred means of mitigating climate change. Forest owners lacking both certification and membership in a forest owner association ranked the ecosystem services recreation and biodiversity significantly higher, and also preferred retaining more old forest within the landscape. The survey results revealed a higher management activity among CMs, resulting in a more frequent establishment of mixed and broadleaved stands. Forest owners with medium to large scale properties were well-represented within the CM category. The results indicated that while the CMs have stronger preferences for roundwood production compared to owners of small properties, they are also more likely to have taken adaptive measures favoring risk management and biodiversity.

Dialogic teaching beyond words

Scientific literature has clarified relevant contributions from dialogic teaching to the improvement of results of university students, both in face-to-face, online and hybrid sessions. There is also scientific research published about the step ahead from speech acts to communicative acts, not only in the field of teaching but also and mainly in relation to consent. There is a lack about how this step ahead is already being a base for new modalities of dialogic teaching. The study we present in this article was made through communicative methodology including a participant observation of two synchronous-hybrid master seminars of adult education and a documental analysis of all the feedbacks written at the end of each session by all students. The results show that, in those two seminars, the dialogic teaching based on communicative acts, beyond speech acts, with a dialogue that includes the scientific evidence of social impact, generates a high valuation of all students about the learning they got, the transformations they can generate with it in educational projects and, in some cases, the transformations of themselves.

Bankruptcy court establishment and corporate risk-taking

This study examines the influence of bankruptcy courts on the risk-taking behavior of listed firms in China between 2002 and 2019. The establishment of bankruptcy courts discourages listed firms from taking excessive risk. This effect is more pronounced in firms with financing constraints, high market valuations, and those operating in regions with a weaker rule of law. Overall, our findings indicate that establishing bankruptcy courts benefits creditors’ rights and restrains corporate risk-taking.

The influence of a highly-valued market on M&A activity

Merger and Acquisition decisions are about timing, opportunity, and decision. In the business world,
 these three words are partially influenced by the strength of the stock market. The timing is when the
 stock market is highly valued which results in high stock valuation, after that is the opportunity which
 means to find a target or if an existing target has lower stock valuation and finally comes the decision to
 make whether to use cash or equity for the transaction. Since companies can use its stock as leverage to
 acquire companies, a highly valued market gives the companies the resource with which to make purchases.
 Therefore, the question arises whether the stock market influences the decision for companies
 to engage in M&A transactions. This question is addressed in this study using a relatively large panel
 data of M&A activity for the period 2008-2017. The econometric tool used in this study is regression
 analysis. The measurement that this study used to value the stock market is by measuring the stock
 market capitalization to GDP ratio of a country. The results displayed that the stock market to GDP ratio
 is statistically significant at 5% risk on the M&A activity and with a 1% increase in the stock market
 we expect a 0.1729% increase in the M&A activity. Additionally, the paper suggests the development of
 a regression model that can measure the FDI inflows in Albania, and this is achieved by adjusting the
 regression model variables in order to become more suitable for its economy.

Value Uncertainty

We examine how time-series volatility of book-to-market (UNC) is priced in equity returns and the relative contributions of its book volatility (variations in earnings and book value) and market volatility components (shocks in required return). UNC captures valuation risk, so stocks with high valuation risk earn higher return. An investment strategy long in high-UNC firms and short in low-UNC firms generates 8.5% annual risk-adjusted return. UNC valuation risk premium is driven by outperformance of high-UNC firms facing higher information risk and is not explained by established risk factors and firm characteristics. This paper was accepted by Agostino Capponi, finance. Funding: The authors acknowledge financial support from Spain’s Ministry of Education [Grant EC02011-24928], Generalitat de Catalonia [Grant 2014-SGR-1079], Banc Sabadell, the Bank of Cyprus, and the European Social Fund. M. El Hefnawy acknowledges financial support from the Spanish Ministry of Science and Innovation [Grant PID2021-128994NA-I00]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4888 .

Optimal nonlinear pricing by a monopoly with smooth ambiguity preferences

This paper examines the optimal nonlinear pricing by a monopolist who has smooth ambiguity preferences and sells a single good to two types of buyers with high and low valuation. Ambiguity arises from the monopolist’s uncertainty about which of the subjective beliefs govern the unobserved types of buyers. We show that the prevalence of ambiguity aversion distorts the rent extraction-efficiency tradeoff under asymmetric information in the standard model. Specifically, the ambiguity-averse monopolist acts in a pessimistic manner with the perception that buyers are less likely to have high valuation than the objective beliefs. Compared with the standard model, low valuation buyers consume a less downward distorted quantity and high valuation buyers enjoy a greater information rent. The unit prices paid by all buyers are reduced and the ambiguity-averse monopolist earns a smaller expected profit.

A Rebalancing of Financial Valuations and Expectations Moving Forward in the Telehealth Sector as the United States Moves Toward a Post-COVID-19 Reality.

The telehealth sector of health care delivery experienced significant growth at the start of the pandemic as web-based care quickly became essential for the ongoing safety of patients and health care providers, such as clinicians and other health care professionals. After vaccines were introduced, however, telehealth companies lost value as the need for web-based care appeared to lessen. Presently, both existing telehealth companies and new entrants to the space are seeking ways to innovate, gain investor and customer buy-in, and overcome competitors. New companies are hoping to be seen not as pandemic-era substitutes, but instead as reinforcements to in-person care, valuable in their own right thanks to the convenience and technological advancements they bring. This struggle to reframe the value proposition, or perceived benefit, of telehealth is reflected in fluctuating stock prices and dropping valuations. This viewpoint summarizes the market volatility seen in the telehealth sector since the start of the COVID-19 pandemic and suggests potential opportunities for growth in the space. This is accomplished through a qualitative secondary research approach, leveraging contemporary sources, financial references such as Yahoo! Finance, and peer-reviewed literature to support predictions for the future market. We found that, in 2020, the size of the US telehealth market rose to US $17.9 billion and is estimated to reach US $140.7 billion by 2030. Additionally, digital health venture funding nearly doubled in 2020 over the prior 2 years with total funding rising to US $14.1 billion. However, these factors produced an oversaturated market in which the volume of supply was higher than demand, resulting in a sharp drop in valuations for some as vaccination rates climbed in 2021. In the face of this rebalancing, or return to normal following excessively high or unsustainable valuations, we suggest a possible path forward for telehealth companies in the postpandemic era. Suppliers' current role in the telehealth space-whether health care industry incumbents, that is, traditional health care delivery systems and companies, or "telehealth-first" challengers-are especially relevant to the specific growth strategies they should pursue. Furthermore, consideration of the areas of medicine and characteristics that best lend themselves to web-based care may lead to a greater chance for long-term success in a postpandemic health care delivery system. In the future, we believe investors should expect a bullish market, that is, one characterized by growing share prices. Success is likely to occur in part through changing the actual models of care, as opposed to moving traditional care to a web-based format. The oversaturated market will likely condense into select established telehealth giants who were able to adapt to the changing landscape. While investors may be reasonably hesitant regarding individual telehealth companies, the industry can expect slowed but continued growth.

Accelerator cohort social network structure and startup performance

Startup accelerators have become a widespread means of supporting entrepreneurs and their ventures. Yet, deductive empirical research explaining and predicting peer effects in startup accelerator cohorts is wanting. Following cues from the theoretical and empirical literatures, we hypothesize and find that higher performing cohorts have more connections between peer startups. This suggests that beyond merely acting as brokers, accelerators enable potentially valuable peer effects. However, as the dark side of density literature suggests, we also hypothesize an inverse curvilinear relationship between cohort peer network density and likelihood that a cohort will produce a unicorn. In this research, we measure the performance of the Startup Accelerator cohort in terms of the number of startups with high valuations in the cohort. High valuation startups were identified by Techstars on their 2019 Top 50 startups list featuring graduates from their accelerator. We approximate the intra-cohort social network structures of 1537 startups comprising 154 Techstars cohorts using their activity on Twitter. We find that there exists an upper limit to the impact of cohort network density on performance, after which any further increase becomes negative.

Heterogeneity in investment behavior in sustainable products: the case of thematic funds

The market and distribution of investment products that contribute to the achievement of the Sustainable Development Goals (SDGs), as a paradigm of the 2030 Agenda, are instruments that investors should incorporate into their financial portfolios. This paper analyses investors' preferences for investment funds that contribute in their investment policy to the achievement of SDG 6. Choice experiment methodology has been applied to try to obtain a valuation by Spanish investors. A survey was carried out in which a total of 456 valid observations were obtained. The results show that there is a high valuation of funds whose portfolios include investments that contribute to SDG 6 and that there is also heterogeneity in preferences.

Personal fabrication as an operational strategy: Value of delegating production to customer using 3D printing

There is a growing interest in the industry around 3D printing. A related phenomenon is personal fabrication (PF) in which a firm sells products' design and lets the customers personalize and manufacture the product using 3D printing services. In this paper, we characterize the market and operational conditions that make PF an attractive operational strategy. We propose a demand market model that captures customer heterogeneity in taste (horizontal) and quality (vertical) dimensions while allowing the market to be skewed with high versus low valuation customers. We quantify three key benefits of PF strategy: (i) the PF strategy enables personalization and improves product fit, (ii) the PF strategy can help the firm through postponement of product configuration, and (iii) the PF strategy enables easier design adjustments and allows design for manufacturability initiatives. Intellectual property and liability risks are significant barriers to the adoption of PF strategy. Furthermore, 3D printing may not be feasible for some parts of the product. In these cases, the firm may pursue the partial PF strategy: delegating only a proportion of the product for customer production. We also identify when partial PF becomes an attractive strategy.

Causes of Valuation Inaccuracy in Mortgage Lending in Ethiopia

This study aims to add to the scarce empirical literature on mortgage valuation by ranking the variables that make inaccurate mortgage valuations. Given the central role, valuation plays in lending, high valuation inaccuracy leads to major market distortions in real estate with potentially harmful financial system repercussions. Thus, this study is envisioned to investigate the causes of valuation inaccuracy for mortgage purpose in commercial banks in Ethiopia. To achieve this objective, the study employed a convergent parallel mixed design. Data were collected from valuers through questionnaires and interviews using purposive, snowball, and convenience sampling techniques. To investigate the impact of the factors on valuation inaccuracy, an ordinal regression model was used. The study revealed that inappropriate valuation methods, the inadequacy of the market data, and property market imperfection were the most significant predictors. However, there are moderately significant causes which include the characteristics of the property market, valuation regulatory framework, and absence of the valuation standard. Client pressure, ethics, and competence of valuers were insignificant predictors. This paper recommends that the government should establish a government agency that is independent and in charge of valuation regulation, developing legal frameworks, and intervening in the property market. Based on the framework valuers should use an appropriate valuation method. Moreover, there should be an establishment of central databases that valuers relied on.

Going green: Environmental risk management, market value and performance

AbstractThis study investigates the relationship between environmental performance and market values of firms exposed to environmental risk that manage effectively to reduce it. Using a sample of 8112 US firm‐year observations during 2012–2020, we document a positive relationship between firms' environmental performance and market‐to‐book value. Moreover, we show that this relationship holds primarily when firms are more vulnerable to environmental risk and proactively manage to reduce it. Our paper not only agrees with the previous literature showing that it pays to be good but, most importantly, shows that such an approach is reflected in higher valuation mostly when companies use sound environmental risk‐control strategies. Contributions and implications are discussed.