Long-term Valuation Research Articles

Market Reaction to Patterns of Earnings

Prior research shows that easily discernable patterns in earnings -- strings of earnings increases (decreases) and breaks in such strings -- affect investors’ long-term valuation of stocks. We examine short-term market reaction before, during, and after earnings announcements to formally test how investors process news of continuation or the end of strings relatively to non-patterned firms. Our results confirm differential reaction measured with cumulative abnormal returns (CARs) between patterned and non-patterned firms. However, we observe the strongest market response to announcements of breaks, than to strings or non-patterned firms. Post-announcement drift (PEAD) and pre-announcement “leakage” is mostly attributable to break firms as well. Our results hold after controlling for information released in earnings announcements and characteristics of firms, patterns and information environment. Breaks in earnings strings might be one of the driving forces behind previously documented market anomalies surrounding earnings announcements, as investors need to re-valuate the stocks when earnings patterns end.

SAVING ENERGY: A REVIEW ON ENERGY SAVINGS IN LIGHTING BUILDINGS IN AN INSTALLATION

The fossil fuel reserves in India are rapidly exhausting with the country's development. To cope with the energy crisis, end-user efficiency plays an important role. This paper deals with energy saving in lighting systems with the replacement of lighting programs, as in India there is in all sectors a growing demand for energy. A number of commonly used lighting sources and their comparison in light production were discussed. The campus lighting system consisting of a T12 fluorescent lamp for monitoring the residential and institutional area of an existing device can be replaced by proposed LED lighting with equivalent performance, but has greater efficiency to reduce light energy consumption, This improvement Endbenutzereffizienz reduce the peak and the average demand of electricity, which reduces the load on the power grid. The annual energy savings through the proposed system are about 65% over current costs, which is a significant achievement of the energy saving technology. The retrofit period for the proposed lighting system installation is a little over three years. The initial investment for a short-term rating is slightly higher, but at a long-term valuation, the initial investment for the proposed regime is reduced by 50%, as the operating time of the proposed system is approximately five times higher higher than the current regime.

Evaluating the Long-Term Valuation Effect of Efficient Asset Utilization and Profit Margin on Stock Returns: Additional Evidence from the Dupont Identity

Purpose – This study investigates the relations between long-window stock returns and prior years’ increases in DuPont identity components: profit margin and asset turnover. In particular, we examine the relative effectiveness of profit margin and asset turnover to predict years ahead stock returns. Design/methodology/approach – To test our assertions, we regress raw, Capital Asset Pricing Model, and Fama-French returns on controls and variables of interest, profit margin, and asset turnover, lagged years t-1, t-2, and t-3. To control for factors that could affect returns over our long windows, we also include returns lagged over years t-1, t-2, and t-3 to coincide with the lagged profit margin and asset turnover variables of interest. Findings – Results show a negative (positive) relation between returns and increases in lagged profit margin (asset turnover). However, the negative returns-profit margin relation is mitigated when increases in profit margin and increases in asset turnover occur in the same lagged year. Originality/value – This study adds to the existing body of research on the DuPont identity by temporally evaluating the relative long run contributions of profit margin and asset turnover to firm value.

Evaluating the long-term valuation effect of efficient asset utilization and profit margin on stock returns

PurposeThis study aims to investigate the relations between long-window stock returns and prior years’ increases in DuPont identity components: profit margin and asset turnover. In particular, the authors examine the relative effectiveness of profit margin and asset turnover to predict years ahead stock returns.Design/methodology/approachTo test the assertions, the authors regress raw, Capital Asset Pricing Model and Fama-French returns on controls and variables of interest, profit margin and asset turnover, lagged years t − 1, t − 2 and t − 3. To control for factors that could affect returns over the long windows, they also include returns lagged over years t − 1, t − 2 and t − 3 to coincide with the lagged profit margin and asset turnover variables of interest.FindingsResults show a negative (positive) relation between returns and increases in lagged profit margin (asset turnover). However, the negative returns-profit margin relation is mitigated when increases in profit margin and asset turnover occur in the same lagged year.Originality/valueThis study adds to the existing body of research on the DuPont identity by temporally evaluating the relative long-run contributions of profit margin and asset turnover to firm value.

Evaluating the Long-Term Valuation Effect of Efficient Asset Utilization and Profit Margin on Stock Returns: Additional Evidence from the DuPont Identity

Purpose – This study investigates the relations between long-window stock returns and prior years’ increases in DuPont identity components: profit margin and asset turnover. In particular, we examine the relative effectiveness of profit margin and asset turnover to predict years ahead stock returns. Design/methodology/approach – To test our assertions, we regress raw, Capital Asset Pricing Model, and Fama-French returns on controls and variables of interest, profit margin, and asset turnover, lagged years t-1, t-2, and t-3. To control for factors that could affect returns over our long windows, we also include returns lagged over years t-1, t-2, and t-3 to coincide with the lagged profit margin and asset turnover variables of interest. Findings – Results show a negative (positive) relation between returns and increases in lagged profit margin (asset turnover). However, the negative returns-profit margin relation is mitigated when increases in profit margin and increases in asset turnover occur in the same lagged year. Originality/value – This study adds to the existing body of research on the DuPont identity by temporally evaluating the relative long run contributions of profit margin and asset turnover to firm value.

The effects of anticipated future investments on firm value: evidence from mergers and acquisitions

I examine the long-term valuation consequence of investment in mergers and acquisitions on acquiring firms through the “anticipation effect,” in which forward-looking prices embed investors’ expectations about the profitability of firms’ future acquisitions. Using a sample of firms with past acquisitions, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Among firms with positive free cash flow (when future acquisitions are likely), those with a worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow (when future acquisitions are less likely), firm value is not systematically related to acquisition history. These findings are consistent with investors forming expectations about the profitability of future acquisitions based on realized acquisition outcomes and valuing these firms based on their likelihood of making future acquisitions. They also provide support for using observed market prices as a proxy for investors’ expectations about future investment opportunities.

Development of the methodology for the evaluation of a hydro-pumped storage power plant: Swiss case study

During the last two decades, an evolving market structure is recognised starting from the spot market and its derivatives, resulting to several other markets such as the Intraday Market (IM), the Balancing Market (BM) and the Reserve Capacity Market (RCM). The participation in these markets has changed significantly the operation policy of the plants and, consequently, their value in the market. The current paper deals with the problem of the long-term valuation of a Hydroelectric Pump Storage (HPS) plant participating in the DAM and IM. For this purpose, an appropriate methodology has been developed while it is demonstrated on a real case study concerning the operation of a Swiss based HPS plant that participates in the DAM and IM of the German electricity market, for a horizon of thirty-five (35) years.

The long-term valuation effects of voluntary dual class share unifications

We study 121 voluntary dual class share unification in Europe during 1996–2009, and uncover evidence suggesting a positive valuation response to governance improvements and a negative valuation response to possible financial tunneling. Corporate governance improvement is attained by abolishing the wedge between ownership and voting rights and by significantly decreasing controlling shareholders' voting power. Financial tunneling is suspected when some controlling shareholders use the unification hype to sell part or all of their holdings at inflated prices. On average, the corporate governance positive valuation effects prevail, and voluntary unifications are accompanied by a statistically and economically significant increase of Tobin's Q.

The Equitization of the Corporate Bond Market: The Impact of ETFs on Bond Yields and Liquidity

Using distinct features of corporate bond ETFs, financial innovation is found to have a significant and long-term positive valuation impact on the systemically important underlying. A one standard deviation increase in ETF ownership reduces high yield and investment grade bond spreads by 20.3 and 9.2 basis points, respectively, implying an average monthly price increase of 1.03 % and 0.75%. Two novel quasi-natural experiments exploit exogenous changes in ETF eligibility to confirm the effect. Examining theoretical explanations for the effect, ETFs are found to decrease liquidity trader participation, increase institutional ownership, and insignificantly or negatively impact the liquidity of individual bonds.

Analyzing Valuation Measures: A PerformanceHorse Race over the Past 40 Years

In this article, the authors compare the investment performance of portfolios sorted on different valuation measures. They find that EBITDA/TEV has been the best performing metric, historically, and outperforms many investor favorites, such as price-to-earnings ratio, free cash flow to total enterprise value, and book-to-market ratio. The authors also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. They find that in contrast to prior empirical work, long-term ratios add little investment value over standard one-year valuation metrics.

On the Effect of Merger Waves on Long-Term Aggregate Stock Market Valuation

In this study, we investigate the effect of merger waves on the long-term valuation of aggregate stock market. Our empirical test shows significant positive relationship between the intensity of past, with four years lag, aggregate merger activity and the valuation of aggregate stock market.

Does the Shiller-PE Work in Emerging Markets?

We test the reliability of the Cyclically Adjusted PE (CAPE) or Shiller PE as a forecasting and valuation tool for 35 countries including emerging markets. We find that the Shiller-PE is a reliable long-term valuation indicator for developed and emerging markets and we use the indicator to predict real returns on local equity markets over the next five to ten years.

Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years

We compare the investment performance of portfolios sorted on different valuation measures. EBITDA/TEV has historically been the best performing metric and outperforms many investor favorites such as price-to-earnings, free-cash-flow to total enterprise value, and book-to-market. We also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. In contrast to prior empirical work, we find that long-term ratios add little investment value over standard one-year valuation metrics.

Share Purchase Plans in Australia: Issuer Characteristics and Valuation Implications

Share purchase plans (SPPs) are offered exclusively to a company's registered shareholders, who may purchase up to $5,000 worth of shares in a 12-month period at a discount to the market price and without any brokerage charge. They have become one of the most frequently used mechanisms for raising publicly traded equity capital in Australia, yet little is known about them from a financial markets perspective. We address this deficiency by documenting the characteristics of Australian firms that have adopted SPPs and assessing their short-term and long-term valuation implications. We find that SPPs are more likely to be issued by firms with lower levels of liquidity and relatively large numbers of shareholders. They have a negative announcement effect, which is associated with the size of the issue, the prior share-price runup, the issue-price discount, the firm's industry, and whether there is enough time for non-shareholders to buy shares in order to participate. Long-run underperformance is also found over extended periods, consistent with much of the seasoned equity offering (SEO) literature. The SPP-issuer did not perform as badly if it was in the mining industry, if it was audited by a ‘Big-N’ firm, or if the issue was underwritten. Conversely, the greater the issue discount, the worse the issuer's long-run performance.

Relationship Quality with a Travel Agency: The Influence of the Postpurchase Perceived Value of a Tourism Package

Relationship quality is an emerging concept that attempts to measure the lifetime value of a customer. The indicators that determine the construct are satisfaction with the relationship, the customer's trust and the customer's level of commitment. This paper considers how the post-purchase perceived value of a tourism package influences the relationship quality with a travel agency. Gummesson posits the existence of a causal link between perceived value and relationship quality. The results show that the tourist's satisfaction is the key variable in the relationship quality. Affect plays a fundamental direct role in long-term valuation, while cognition is more influential in the short term.

Storm water runoff concentration matrix for urban areas

The infrastructure (roads, sidewalk, commercial and residential structures) added during the land development and urbanisation process is designed to collect precipitation and convey it out of the watershed, typically in existing surface water channels, such as streams and rivers. The quality of surface water, seepage water and ground water is influenced by pollutants that collect on impervious surfaces and that are carried by urban storm water runoff. Heavy metals, e.g. lead (Pb), zinc (Zn), copper (Cu), cadmium (Cd), polycyclic aromatic hydrocarbons (PAH), mineral oil hydrocarbons (MOH) and readily soluble salts in runoff, contribute to the degradation of water. An intensive literature search on the distribution and concentration of the surface-dependent runoff water has been compiled. Concentration variations of several pollutants derived from different surfaces have been averaged. More than 300 references providing about 1300 data for different pollutants culminate in a representative concentration matrix consisting of medians and extreme values. This matrix can be applied to long-term valuations and numerical modelling of storm water treatment facilities.

Changes in REIT Stock Prices, Trading Volume and Institutional Ownership Resulting from S&P REIT Index Changes

Executive Summary. This study investigates the announcement effects of additions and deletions of individual stocks in the S&P REIT Index. The findings indicate a small but significant stock price reaction to additions. However, an addition or deletion has no impact on trading volume and institutional ownership. Overall, there is but limited opportunity for institutional investors to earn abnormal returns around changes in the REIT Index because of trading costs and other incidental expenses. However, individual investors may be able to exploit the arbitrage opportunity if their trading costs are lower. Finally, significant long-term valuation gains following deletions are found—apparently, deletions serve to discipline managers to improve performance.

Conflict of Interest or Certification? Evidence from IPOs Underwritten by the Firm's Relationship Bank

We examine the long-term return performance and fundamental valuation of IPOs underwritten by relationship banks. We find that over one- to three-year horizons these IPOs yield returns similar to those on IPOs underwritten by non-relationship banks. Moreover, we show that there is selection among firms that go public with their relationship bank. Investors value these new issues higher than similar IPOs underwritten by non-relationship banks. These findings support the certification role of relationship banks and suggest that, in this respect, the effect of the 1999 repeal of Sections 20 and 32 of the Glass-Steagall Act has not been negative.

Diversification, Ownership and Control of Swedish Corporations

We study the short- and long-term valuation effects of Swedish takeovers. Using a sample of 93 bidding firms that acquired 101 targets between 1980 and 1995, we find that diversifying acquisitions lead to a negative market reaction and deterioration of the operating performance of the bidder. Announcement and performance gains in each of the three years following the acquisition occur only when bidders expand their core rather than their peripheral lines of business. Our findings suggest that focused acquisitions lead to greater synergies and operating efficiencies than diversifying acquisitions. Intra-group acquisitions, however, show that bidders do not realise significant gains whether they adopt diversifying or focusing investment strategies by purchasing firms controlled by the Wallenberg and SHB conglomerate groups. Intra-group targets realize significant gains regardless bidder's investment strategy. Finally, the evidence does not support the view that intra-conglomerate acquisitions are associated with expropriation of minority shareholders. However, they appear to enhance the control rights of large shareholders of the bidding firm.

Diversification, Ownership and Control of Swedish Corporations

We study the short‐ and long‐term valuation effects of Swedish takeovers. Using a sample of 93 bidding firms that acquired 101 targets between 1980 and 1995, we find that diversifying acquisitions lead to a negative market reaction and deterioration of the operating performance of the bidder. Announcement and performance gains in each of the three years following the acquisition occur only when bidders expand their core rather than their peripheral lines of business. Our findings suggest that focused acquisitions lead to greater synergies and operating efficiencies than diversifying acquisitions. Intra‐group acquisitions, however, show that bidders do not realise significant gains whether they adopt diversifying or focusing investment strategies by purchasing firms controlled by the Wallenberg and SHB conglomerate groups. Intra‐group targets realize significant gains regardless bidder’s investment strategy. Finally, the evidence does not support the view that intra‐conglomerate acquisitions are associated with expropriation of minority shareholders. However, they appear to enhance the control rights of large shareholders of the bidding firm.