Market Cap Research Articles

Lessons learned from CEO pay and market cap performance in the mining and metals industries: Implications for the board of directors and for corporate governance

CEO pay was correlated with market capitalization performance. Three simple correlation tests of 2013 total CEO pay with market capitalization destruction over the approximate three and one-half year period, January 2011 through July 2014, yielded a 66% weighted average moderate correlation for thirty-four companies. The total market cap destruction for these companies was an estimated $120.1 billion with total CEO pay of $224.6 million. Thus, total market cap destruction was approximately 535 times greater than total CEO pay. During this approximate three and one-half year time period, the S&P 500 Index increased 51.8%. Our simple correlation tests do not imply any causality. However, some corporate governance researchers (Kostyuk, 2014 and Hilb, 2008) have advocated: “Pay for Performance, not Presence” which could include such correlations as part of executive compensation packages from Board of Directors’ compensation committees. Claw-back provisions could be used for market capitalization destruction in evolving executive compensation packages.

Corporate governance and market cap destruction: A predictive model

By focusing on specific board variables, both company performance and stock market performance have been investigated and a more comprehensive corporate governance approach has been advocated to help improve such performances (Larcker et al. 2007 and Grove et. al. 2011). In this paper, we extend such analyses by investigating a relationship between such corporate governance variables and market capitalization. We specifically integrate corporate governance variables into a predictive model for market capitalization (cap) destruction, using the example of the largest six (“Big 6”) gold mining companies publicly-listed in the U.S.

The Strategic CFO -- Capitalizing on Undervaluation -- Pericom Semiconductor and Broadcom Case Studies -- The Cashless Buyback<sup>(TM)</sup> and Precedent Transactions

A Cashless Buyback™ is a low risk transaction that enables a public corporation to capitalize in size on a period of substantial equity undervaluation. Secondary benefits for a firm include increased trading volume, a broader investor base, elimination of short interest, improved equity capital market access, and important merger and acquisition (M&A) considerations. The transaction is an attractive supplement or superior alternative to a traditional stock buyback program. Because it is low risk, it can be confidently implemented in size. This report underscores M&A considerations of Cashless Buybacks™ through 2 case studies.Pericom Semiconductor (PSEM) - In 2013 and 2014, Cashless Buyback™ proposals were delivered to Pericom when it was trading at about $8.00 per share (about $182 million equity market cap). In September 2015, Pericom received two takeover bids offering about $18.00 per share. Had Pericom elected to implement either of the Cashless Buyback™ proposals it received, the takeover offers would have been priced about $12.00 higher, and, regardless of whether either takeover proposal closed, Pericom would have received roughly a $274 million, tax-free, cash, “equity bonus” payment worth about $12.00 per share. Broadcom Corporation (BRCM) - In 2013, a Cashless Buyback™ proposal was delivered to Broadcom when it was trading at $25.32 per share ($14.7 billion equity market cap). In May 2015, Avago agreed to acquire Broadcom for over $54.50 per share. Had Broadcom elected to implement the 2013 Cashless Buyback™, the Avago offer would have been priced nearly $24.00 per share higher, and, regardless of whether the takeover closed, Broadcom would have received a $14.5 billion, tax-free, cash, “equity bonus” payment worth nearly $24.00 per share. A list of Cashless Buyback™ precedent transactions is provided. The instrument used in a Cashless Buyback™ has features similar to those of Performance Rights (PRs), Conversion Rights (CRs), Contingent Value Rights (CVRs), convertibles and options. Insofar as a Cashless Buyback™ is composed of these tried-and-true elements, it is not “new”. Still, this exact transaction has not been done, and no CFO is eager to be first. Tech firms feed on innovation, but their CFO’s survive through prudence. Pericom and Broadcom are not the only firms to miss a chance to profit from a Cashless Buyback™, but missed opportunities go untallied. Until the first successful Cashless Buyback™ attracts attention, the instrument may gather dust, the left-handed, counter-twist do-hickey of every CFO’s tool kit.

The Market for Cryptocurrencies

Although it is sometimes considered one of a kind, or a first-mover monopolist in the market for cryptocurrencies, Bitcoin is surrounded by effective competitors. Between March 2013 and December 2014, while the market capitalization of Bitcoin grew four-fold, the market cap of other cryptocurrencies (“altcoins”) in the aggregate grew twelve-fold, eroding Bitcoin’s market share to 84% from 95%. Where Bitcoin is a non-profit project, the growth of altcoins has been driven by for-profit enterprises. Altcoins have introduced improvements in speed, robustness, and privacy. Contrary to the predictions of economists who tried to imagine what private irredeemable currencies would look like, cryptocurrencies have attained positive valuations by implementing a nominal quantity commitment with an observable public ledger, rather than by the traditional method of redeemability or a purchasing-power commitment. Cryptocurrencies are not all bubbles, although a number of bubble-like crashes (to below 98% of peak value) can be observed in the record. There is no reason to suppose that the market is plagued either by insufficient competition or by too much competition.

The benefits of international diversification: market development, corporate governance, market cap, and structural change effects

This paper examines the benefits of international diversification for US investors, while accounting for market development, corporate governance, market cap effects, and structural change across countries over the period August 1996–July 2013. Improved risk adjusted returns are obtained from a diversified portfolio consisting of a mix of developed and emerging countries. Additionally, we find that diversification benefits are not significant for most of the small-cap foreign assets when an investor already holds a position in corresponding country-large-cap assets. Diversification benefits based on the governance effectiveness of a country's companies are not ubiquitous. We find that economically significant improvements in risk-return performance can be attained by adding large caps of developed countries with high and low overall Governance Metrics International (GMI) ratings and large and small caps of emerging countries with low overall GMI ratings to the investment universe containing the assets of common law developed countries. However, diversification benefits are economically significant only for large and small caps of low GMI emerging countries when short selling is not allowed.

What happens when a stock is added to the Nasdaq-100 index? What doesn’t happen?

Purpose – Prior research on additions to the S & P 500 and the smaller MidCap 400 and SmallCap 600 indexes reach different conclusions regarding the key variables that explain the cross-section of announcement period abnormal returns. Most notable in this regard is that liquidity measures, long thought to be of importance, do not appear to explain abnormal returns of the S & P 500 when other factors are controlled for. By contrast, they do appear to matter for additions to the smaller stock indexes. To explore this difference, the purpose of this paper is to analyze the abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index in a cross-sectional manner, controlling for several possible alternative factors. Design/methodology/approach – This paper analyzes abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index. The authors consider several possible sources of the positive price effects in a multivariate setting that controls simultaneously for measures of liquidity, arbitrage risk, operating performance and investor interest and awareness. The authors then analyze both trading volume and the bid-ask spreads. The authors finally examine analyst and investor interest, focussing on changes in analyst coverage. Findings – The authors find that only liquidity variables are significant, but that factors representing feedback effects on the firm’s operations and level of managerial effort are not. The authors find that the average bid/ask spreads of stocks added to the Nasdaq-100 index are lower after the addition. The authors also find that the number of analysts following a stock increases significantly after addition, verifying increased analyst interest. Both forms of evidence are consistent with the hypothesis that the additions are associated with enhanced liquidity for the stocks. Originality/value – The authors conclude that what does happen to a Nasdaq stock when it is announced that it will be added to the Nasdaq-100 Index is that more analysts are drawn to it, and its market liquidity is enhanced. The authors conclude that what does not happen is that there is no evidence of significant effects of enhanced managerial effort or operating performance associated with the inclusion. This difference is noteworthy because it suggests that a certification effect of additions to the S & P indexes associated with S & P’s selection process are unique to it and do not apply to the Nasdaq-100 Index additions based on market cap alone. The results provide indirect evidence on the existence and significance of the certification effect associated with additions to the S & P indexes.

Economic evaluation of introduction of poplar as biomass crop in Italy

Abstract Lignocellulosic biomass production deriving from agro forest species, as well as poplar ( Populus spp.), has denoted an increase in last years in UE also thanks to a series of policies aimed at reducing emissions of greenhouse gases and promoting renewable sources. In Italy poplar represents the main agro forest species and it is cultivated according to two different methods: very Short Rotation Coppice (vSRC) and Short Rotation Coppice (SRC). The aim of this paper has been to evaluate the economic feasibility of poplar as energy crop in the southern Italy and specifically to consider its competitiveness with respect to conventional crops. In particular, an economic analysis in a representative case study located in the Sicilian hilly hinterland has been carried out, by comparing the direct costs and incomes of poplar (both vSRC and SRC) and durum wheat. Results showed that only introduction of SRC plantation could increase the farm competitiveness, while vSRC could be economically advantageous only with a substantial increase of biomass market price and/or CAP subsidy. However, the introduction of poplar should grant a better contribution to climate change mitigation with respect to annual crop, improving the greenhouse gases balance and diminishing the environmental impact of agricultural activity.

Inv and Sav Wallets: The Role of Financial Intermediaries in a Digital Currency

In order to evolve beyond bitcoins, which are still speculative, volatile and small in terms of market cap, cryptocurrencies need decentralized financial intermediaries. In this work we first show that one fundamental role they can take regards price stability. The Economist and the Center for Financial Stability focus on the importance of regulating money supply for stable prices in a digital currency, and http://ssrn.com/abstract=2425270 designs a cryptocurrency where money supply is regulated to match money demand. This first proposal, however, has a limitation: the mechanism for stable prices implies that the amount of money in every account is continuously modified. This way the instability of prices typical of bitcoins is transferred to accounts, so that the purchasing power of savings is still less protected from inflation/deflation than in standard fiat currencies.The solution is to give wallet owners the freedom to choose how much they want to be affected by changes of money supply, by introducing two types of wallets: Inv wallets and Sav wallets. Money in Sav wallets is protected from instability thanks to the presence of Inv wallets, that take the risk, and the reward, of being the target of changes in money supply. This role of channel and cushion for monetary policy is taken by banks in fiat currencies, and is needed also in digital currencies, where it can be taken by decentralized financial intermediaries. This is a starting point to analyze the other roles that financial intermediaries can have in a digital currency, linking the ownership of Inv wallets to proof-of-stake validation of transactions and to lending.The appendix explores the possibility of currencies indexed to property prices registered in a block chain.

Practical Applications of Fundamentally Weighted Global Small Companies

Institutional investors should consider how to avoid potential pitfalls associated with using fundamental indexing in a small company universe. <b>Fundamentally Weighted Global Small Companies</b>, which was published in the Summer 2013 issue of <b><i>The Journal of Portfolio Management</i></b>, explores whether a small company universe as defined by fundamental measures of size, rather than market cap, is a step in the right direction for simple value investing. In this <b><i>Practical Applications</i></b> report, author <b>Peter Bull</b> advises investors how to think about company size in relation to fundamental economic measures and create a small company universe. He also discusses the importance of implementing market-cap bands. Bull is Head of Portfolio Construction at <b>Ibbotson Associates</b>. “[Investors using fundamental indexing] really are taking all of the risks inherent with a simple value strategy,” Bull cautions.

Growth/Value, Market Cap, and Momentum

This article examines the profitability of style momentum strategies on portfolios based on firm growth/value characteristics and market capitalization. The authors use monthly total returns of nine S&amp;P style indexes to avoid concerns about firm size, liquidity, credit risk, short-sale constraints, and transaction costs. They find that, historically, buying a past best-performing style index and short-selling a past worst-performing style index generates an economically and statistically significant profit of 0.8% a month over the June 1995 to March 2009 period. This profitability remains economically plausible after adjusting for systematic risk, short-sale costs, and transaction costs. Thus, investors may seek outperformance by implementing style momentum strategies on exchange-traded funds linked to S&amp;P style indexes. <b>TOPICS:</b>Style investing, exchange-traded funds and applications

Risk weighted alpha index – analysis of the ASX50 index

Major stock indexes are developed on the market capitalization or price weighted indexation method. The Australian Stock Exchange 50 (ASX50) index is a market capitalization index of the top 50 Australian stocks. Fundamental indexation, equal weighted index and risk weighted index methods have recently been developed as an alternative to the market cap and price indexes. However, empirical studies do not conclusively prove if these alternate methods are more efficient to the existing market cap or price weighted methods. Also, the fundamental index method provides a higher alpha, while the risk weighted index methods focus on risk reduction through diversification. There is a gap to develop another passive indexation method in order to provide the investor a higher return (alpha) and lower volatility. This paper re-weights the ASX50 index using the risk weighted alpha method and provides higher weight to stocks that have increasing returns and lower volatility. The empirical study for ASX50 index from 2002-2012 is undertaken and results show that the risk weighted alpha method provides higher return and has lower systematic risk than the ASX50 index.

Valuation of Innovation and Intellectual Property: The Case of iPhone

We use data on both daily stock returns and internet activity to estimate the value of Apple's iPhone and related intellectual property. We find the private value of iPhone to be 10%–13% of Apple's market cap. Grounded in the resource‐based theory, we argue that much of this value stems from Apple's managerial capabilities to capitalize on the product, as proprietary technology explains about 25% of the private value. This effect arises from patent applications, rather than grants or trademarks. Our analysis of the global supply chain of iPhone suggests that besides Apple, firms in the supply chain are able to capture very limited value from iPhone. These results support the theory of dynamic capabilities, maintaining that a firm's unique dynamic managerial and organizational capabilities are crucial for value creation in globally competitive innovative industries.

Performance of Portfolios Based on E/P, B /M and Size: Evidences on Indian Stock Market

The main objective of the present study is to examine the consistency in the performance of various portfolios constructed on the basis of three fundamental factors (E/P, B/M and Size). It has examined whether the investment strategies based on three major fundamentals, i.e., Earnings- to- Price Ratio, Book-to-Market Price Ratio and Size of the firms result into extra ordinary returns to the investors in the short run or not. The short-term analysis based on yearly performance of various portfolios has not given any sound base to believe on these parameters as short-term stock selection criteria. But out of three fundamental factors considered in the present study, the highest inconsistency was found in the performance of portfolios based on market cap of the firm rather than portfolios based on E/P ratio or Book to market price ratio.

Is Traditional Indexation Passé?Vanguard Versus the Enhanced Indexers: DFA, RAFI, and WisdomTree

Vanguard provides low-cost capitalization-weighted mutual funds: traditional index funds. The asset allocation of DFA’s core funds is determined by fundamentals as well as market cap. RAFI’s allocation depends on four fundamental factors—dividends, cash flow, sales, and book equity value. WisdomTree’s allocation is also determined by fundamentals alone. We compare returns of these enhanced index funds with corresponding Vanguard mutual fund portfolios. Focusing on U.S. funds only, DFA had lower returns than portfolios of Vanguard funds that mimicked their style; RAFI and WisdomTree out-returned Vanguard. Two cheers for enhanced indexation and one for traditional. <b>TOPICS:</b>Mutual fund performance, passive strategies, portfolio theory

Methods for Investigating Growth

Growth theory has tended to find its data in national accounts. These show flows alone, including capital growth (net investment), but no measure of the capital denominator itself. A proved technique is to compare changes in investment to changes in output after a lag. This study illustrates a separate method from simultaneous percent rates rather than lagged flows. It can be applied to security market series, where capital is transparent as market cap, or to national accounts where capital is proxied from separate sources. It allows provision for growth in human capital as well as physical capital.

Impact of International Financial Flows on Indian Stock Markets – an Empirical Study

FDI and FII have become instruments of international economic integration and stimulation. Fast growing economies like Singapore, China, Korea etc have registered incredible growth at onset of FDI. Though US captures most of the FDI inflows, developing countries still account for significant growth of FDI and rise in FII. FDI not only gives access to foreign capital but also provides domestic countries with cutting edge technology, desired skill sets, tools of innovation and other complementary skills. The policies drafted to stimulate the flow of foreign capital in to India provided much needed impetus for India to emerge as an attractive destination for foreign investors. External factors such as global economic cues, FDI & FII, Exchange rate and Internal factors such as demand and supply, market cap, EPS generally drive and dictates the Indian stock market. The current paper makes an attempt to study the relationship and impact of FDI & FII on Indian stock market using statistical measures correlation coefficient and multi regression for 12 years data starting from 2001 to 2012. Sensex and Nifty were considered as the representative of stock market as they are the most popular Indian stock market indices.

10 Years Later: Where in the World is Equal Weight Indexing Now?

Often the most powerful investment ideas are simple. The S&P 500 EWI 10 years ago pioneered the simple concept of equal weighted indexing. It has now expanded in the U.S. into the S&P 100, a MegaCap index, S&P MidCap 400® and S&P SmallCap 600®. The equal weighting idea has also been applied to international equities, as well as in other asset classes such as fixed income indices and commodity indices. It has become one of the most popular alternatively-weighted ideas. While the headline cause of asset flows has been outperformance over market-cap indices, sophisticated investors have realized that equal weighting creates a different set of risk factor exposures than market cap weighting that seem to have worked over the long-term as noted in the paper. Furthermore, the concept randomizes factor mispricings in the market, and it can serve as a performance benchmark for alternative-weighted indices.

Lehman Brothers and Bear Stearns: risk assessment and corporate governance differences?

In mid-March, 2008, with substantial government support, JP Morgan Chase agreed to acquire Bear Stearns for $10 per share. Because Bear’s shares traded at $170 a year earlier, the market cap destruction of 94% was devastating to the once venerable investment bank and its investors. The Financial Crisis Inquiry Commission had also cited as failure the inconsistent treatment by the federal government in helping to bail out Bear Stearns in March, 2008 but letting Lehman Brothers go into bankruptcy in September, 2008. This paper investigates such inconsistencies by comparing and assessing the risk management and corporate governance practices of Bear Stearns and Lehman Brothers in their March-September, 2008.

Coal company valuation, production and reserves

The primary determinants of the value of a coal company are its cash flows and earnings, which is dependent upon the quantity and quality of the coal it produces and coal selling prices; future production potential, which is described by its reserves; and its inventory of capital assets, mining equipment, infrastructure, and acreage. The purpose of this paper is to establish the relationship between the factors that determine company value for a cross-section of publicly traded North American coal companies for the year ending 2010. We review the consolidation trends of North American companies and the factors that impact company value. Companies vary in the size of their reserves and production, earnings, number and type of mines, use of technology and automation, areas of operation, sales markets, degree of diversification, and financial structure. We construct regression models for US and Canadian coal companies according to production, reserves, financial structure, and coal selling price. We show that reserves and assets are strong indicators of market capitalisation and enterprise value. Large producers exhibit a robust correlation between production and reserves, and small companies trade at a premium relative to large producers. We infer effective enterprise value and market cap for a sample of private companies.

Buying High Return Low Volatility Technology Stocks

ABSTRACT. Technology stocks provide higher returns but can be associated with high levels of volatility. This occurs are technologies go in and out of fashion, which impacts future profits and stock prices. This paper introduces the concept of Risk Weighted Alpha, which identifies stocks that have outperformed over a long period of time and there is usually a tendency for such stocks to keep growing further. When this trend breaks then this method also advises to keep reducing the weight of these stocks within the portfolio. As an example, the NASDAQ 100 index stocks are analysed to understand how the Risk Weighted Alpha method can be applied. Results show that the Risk Weighted Alpha portfolio delivered three times higher return than the NASDAQ 100 index with the same level of systematic risk.JEL Codes: R53; H54Keywords: indexation; portfolio theory; portfolio construction; stock selection; fundamental indexation and alpha1. IntroductionTechnology companies like Apple, Intel, Google and IBM for example have had exponential growth in stock prices over the years. However, there are numerous companies that have fallen over, especially during the dotcom bubble in 2001-02. So, how do you pick companies that will grow overtime? This paper takes the example of the NASDAQ 100 index to analyze companies that have grown and are expected to keep growing over time compared to those that have not performed. Before we move is discussion further, we need to realize that the NASDAQ 100 is a market capitalization based index. This means that the stocks that form the NASDAQ 100 index are the biggest companies in terms of market capitalization or value that are listed on this index. NASDAQ is primarily an index that lists technology related companies in the United States. Most major indexes like the Dow Jones Industrial Average, SP 2008; 2010) have provided the fundamental indexation method that utilizes five fundamental factors: revenue, sales, cash flow, employment and book value, in order to develop the index weighting of stocks. They argue that the fundamental index is a more efficient indexation method compared to the market capitalization weighted index method. Researchers (Kaplan 2008, Hemminki et al. 2008, Hsu et al. 2006, Blitz et al. 2008, Estrada 2006, Chen et al. 2007, Siegel 2006, Mar et al. 2007, Mar et al. 2009, Blitz et al. 2010 and Basu and Forbes 2013) argue that the evidence is inconclusive if the fundamental index method is actually more efficient than the market capitalization method and if it then this is mainly due to the value and small cap bias in the fundamental index method.An alternative to the market cap and fundamental indexation methods are the equal weighted and risk weighted indexes. Equal weighted indexes as suspected weight each stock with equal weight in the index and are seen to be profit taking indexes because over time they reduce the weight of the stocks that have increased in value and increase the weight of stocks that have decreased in value (Bemartzi and Thaler 2001, Winde liff and Boyle 2004 and DeMiguel et al, 2007). As a result, these indexes are seen to have a high tracking error to market cap based indexes and require frequent index rebalancing. There are a variety of risk weighted index methods that have been developed, which are the minimum variance (MV), equally weighted portfolio, maximum Sharpe ratio (MSR), most diversified portfolio (MDP), equally-weighted risk distribution (ERC) portfolio and semi-variance portfolio (Demey et al. 2010).While, risk weighted methods reduce risk through diversification, they also reduce the overall return. …