Stock Overvaluation Research Articles

A Financial Analysis and Valuation of Home Depot

This study aims to research and analyze the firm’s valuation of Home Depot by exploring the company’s background and recent events, evaluating company performance, forecasting future development, and discovering the firm’s strategy and risk. The performance evaluation uses liquidity, solvency, and profitability to assess the firm operations and use of resources. The additional valuation adopts current and next year’s forecast financial data to measure the company’s EPS and revenue growth rate, P/E, PEG, and GP/A ratios. The results show that Home Depot has high liquidity, high profitability, and low solvency from its operational performance, as well as a high long-term valuation forecast in the home improvement retail industry. This consequence implies that Home Depot may have efficient business management and sound financial health by effectively meeting short-term obligations and using assets to generate revenue. Meanwhile, the company may also pose several risks, including an unstable economic environment, difficulty meeting long-term obligations, the continued decline in annual gross margins and ROIC, and potential stock overvaluation for investors.

Income Smoothing and Overvaluation

Purpose: This research evaluates two views of the effect of income smoothing on stock overvaluation. There is a view that income smoothing impairs the usefulness of profit information by distorting the economic substance of a company. While another view is income smoothing can serve as a means of conveying classified information within a company. With the two views, it is unclear to predict income smoothing's relevance to overvaluation of stocks. Therefore, this paper aims to analyze the relationship between income smoothing and stock overvaluation in the capital market. Design/methodology/approach: The study conducted on the KOSPI and KOSDAQ markets from 2011 to 2020, and measured income smoothing using the methods suggested by Leuz et al. (2003), Park et al. (2011), and Tucker and Zarowin (2006). For stock overvaluation, the method of Rhodes-Kropf et al. (2005) used. Findings: This study provided empirical evidence that there is a negative relation of income smoothing with stock overvaluation, which may be interpret that income smoothing may lower stock overvaluation. In other words, priv-ileged information delivered by the manager through income smoothing may alleviate the overvaluation of stocks caused by excessive stock price relative to its intrinsic value. This result was more observable as the greater majority shareholder ownership interest, the greater the foreign investors share, and for companies listed on the KOSDAQ. Research limitations/implications: This study makes contribution to the literature by supplying other evidence on the effect of income smoothing on capital market and supplies meaningful guidance to capital market stakeholders. Originality/value: This study is valuable not only because it expands earlier research on income smoothing and stock overvaluation, but also because it empirically confirms the usefulness of income smoothing in the capital market.

Do Short Sellers Target Firms with High Climate Risks? International Evidence

ABSTRACT Using an international sample of firms from 36 countries over the period 2002 to 2018, we investigate whether short sellers take firms’ climate risk into consideration when making investment decisions. Our empirical results show that short sellers increase their short-selling interest in firms with high carbon emission intensity but shun good carbon performers. Furthermore, the effect of climate risk on short-selling interest is more pronounced for firms operating in countries or regions that have adopted an emission trading scheme (ETS) as well as in countries characterized by higher regulatory quality and greater media pressure. We also document that short sellers in countries with stringent carbon regulations, higher environmental awareness, and superior environmental performance are more sensitive to climate risk. Our channel analyses highlight that stock overvaluation and an opaque information environment are two potential motives for short-selling interest in carbon-risky firms.

Stock Overvaluation, Management Myopia, and Long-Term Firm Performance

Stock Overvaluation, Management Myopia, and Long-Term Firm Performance

Volume and stock returns in the Chinese market

We propose and empirically investigate hypotheses regarding the volume-return relationship in the Chinese stock market, taking into account the impact of prevalent noise trading and short-selling restrictions. Our findings reveal a negative correlation between trading volume and returns specifically among overvalued stocks. However, no significant correlation is observed for undervalued stocks, nor is there a consistent volume amplification effect. In contrast to our findings, Han, Huang, Huang, and Zhou (2021) also reported a positive correlation between expected return and trading volume for undervalued stocks, and they highlighted the amplified impact of trading volume in the US market. Furthermore, we observe that stricter short-selling restrictions in the Chinese market for overvalued stocks result in a larger deviation from fundamental value as the trading volume increases accompanied by greater disagreement among noise investors. These findings suggest that comprehending market disparities necessitates considering noise trading and short-selling restrictions as crucial factors.

The National Team: Stock market interventions and corporate catering behavior

We examine corporate catering behavior following the Chinese government's stock market interventions in 2015, which result in significant stock overvaluation. The government's direct share purchases cause higher levels of horizontal agency conflicts between the controlling and minority shareholders, and the affected firms are more likely to cater to the controlling shareholders and top executives' aversion to receiving overvalued stocks. We focus on the changes in stock dividends and equity-based executive compensation and find evidence consistent with the catering hypothesis while employing difference-in-difference approach. Our study demonstrates the intricate interactions between state interventions and corporate decisions.

Market Timing and Asymmetric Information: How do Rights Issues and Private Placements Attract Investors to Overvalued Stocks?

Manuscript type: Research paper Research aims: This study examines the background of selecting the equity offering mechanism between rights issues and private placements when facing asymmetric information and overvalued prices. Design/Methodology/Approach: This research employs the concept of information asymmetry and focuses on analysing market timing data about stock offering transactions in Indonesia from 2000 to 2020. This study uses regression analysis to examine the correlation between information asymmetry and trade volume. Abnormal trade volume before various offerings is subjected to regression analysis using generally used proxies for information asymmetry. Research findings: The conclusions of our research indicate that companies that issue more shares than the overpriced stock tend to exhibit a more excellent abnormal return value in the context of rights issues. The sales volume indicates the company’s prospects derived from private information obtained during the offering Theoretical contribution/Originality: There is a shortage of existing literature about research that specifically investigates the identification of SEO techniques that elicit negative market responses. Consequently, this study explores the connection between the underlying motivations driving the selection of stock offering mechanisms. Practitioner/Policy implication: The distribution of profits in the transaction indicates the company’s future policies. Before investing, investors can acquire pertinent information on the company’s current state, strategic goals, and prospects. Research limitation: The present analysis has not considered the factors of internal ownership or insider trading. These factors might serve as a foundation for investigating the underlying incentives for issuing shares with more precise market timing considerations.

Annual Report Readability and Opportunistic Insider Selling—Evidence from China

ABSTRACT Using a panel dataset of Chinese A-share listed firms during 2007–2021, we specify a fixed-effects model to examine whether and how annual report readability affects opportunistic insider selling. Our empirical findings show that lower readability of annual reports induces insiders to make more opportunistic sales. Further analysis reveals that stock overvaluation is the channel through which the readability of annual reports affects opportunistic insider sales. In addition, this effect is more pronounced among firms with less analyst coverage, higher retail concentration, and non-SOEs.

ANALISIS CAPITAL ASSET PRICING MODEL PADA SEKTOR ENERGI PERIODE 2020-2022

This study used the capital asset pricing model (CAPM) to examine the return and risk levels of energy sector stock performance to identify efficient and inefficient groups of stocks. For the purpose of this study, a sample of 28 stocks from the energy sector listed on the Indonesia Stock Exchange for the 2020–2022 timeframe was chosen using a purposive sampling technique. Six out of the 28 equities, according to the analysis's findings, are considered to be high risk. PT Medco Energi Internasional and PT Perdana Karya Perkasa Tbk are the two stocks with the greatest and lowest respective levels of risk. Nine shares of firms out of the 28 stocks tested fall under the category of inefficient stocks (overvalued), whereas 19 other stocks fall under the category of efficient stocks (undervalued). Selling overvalued stocks and purchasing undervalued ones are two different financial decisions that should be made. Overvalued stocks should be sold, while undervalued stocks should be purchased.

Analisis Risiko dan Return Menggunakan Metode CAPM Terhadap Keputusan Investasi pada Indeks LQ45 Periode 2018-2022

This study aims to analyze stock returns and risks, as well as grouping efficient and inefficient stocks to make investment decisions using the Capital Asset Pricing Model (CAPM) model. This type of research is descriptive research with a quantitative approach. The samples used were companies in the LQ45 index in the infrastructure and transportation sectors during the 2018-2022 period using the purposive sampling method so that a total sample of 2 companies was obtained. Calculations using the CAPM model result in 1 efficient company and 1 inefficient company. Shares of PT. XL Axiata Tbk. is an undervalued stock, because the value of the individual rate of return (Ri) is higher at 0.00152 or 0.15%, with the resulting investment decision for stocks in the efficient category is to consider buying these shares at the lowest price today before experiencing an increase in the future. While the shares of PT. Telkom Indonesia Tbk. is an overvalued stock, because the value of the individual rate of return (Ri) is lower at 0.00190 or 0.19% of the expected rate of return E(Ri) which is 0.00223 or 0.22%, the resulting investment decision for stocks with inefficient category is to sell the shares at the highest price now and before experiencing a price decline in the future.

ANALISIS PORTOFOLIO OPTIMAL MODEL CAPM DALAM PENGAMBILAN KEPUTUSAN INVESTASI SAHAM PADA IDXQ30

This paper aimed to analyze the optimal portfolio based on the Capital Asset Pricing Model (CAPM) method by classifying the undervalued and overvalued stocks. The population of this paper are stocks listed on IDXQ30 in the 2022-2023 period, there are 22 stocks used as research samples. This paper used IDXQ30 daily closing price, closing price of the daily Jakarta Stock Exchange Composite Index on the IDX, and Bank Indonesia's daily reference interest rate or the BI-7 Day Reverse Repo Rate. The results of this paper indicated that CAPM method generates 8 undervalued stocks and 14 overvalued stocks. Undervalued stocks consist of KLBF, ITMG, ASII, UNTR, BBCA, PTBA, BMRI and HRUM while overvalued stocks consist of MIKA, SIDO, HEAL, INTP, UNVR, HMSP, MNCN, CPIN, TLKM, TAPG, LSIP, ACES, SCMA and SRTG. The investment decisions are made by buying stocks that are classified as undervalued and selling stocks that are classified as overvalued.
 
 Keywords: Capital Asset Pricing Model, IDXQ30, Investment Decision, Optimal Portfolio

Why momentum concentrates among overvalued stocks?

Abstract We uncover a link between momentum and overvaluation: assets that generate strong momentum profits have lower risk-adjusted unconditional returns; conversely, trading momentum within overvalued assets doubles the profit of the standard momentum strategy. We compute the profits of a momentum strategy within various portfolios; portfolios within which momentum is profitable are defined as momentum trading opportunity (MTO). High-MTO assets have negative unconditional alphas and concentrate in the short legs of most anomalies; controlling for MTO reduces anomaly alphas by up to half. These results imply that the existence of other anomalies is closely linked to the existence of momentum and they should be studied jointly.

Short selling and the independence of business‐related analysts: Evidence from an emerging market

AbstractThis paper investigates whether short‐sale deregulation improves analysts' independence in an emerging market where conventional mechanisms mitigating conflicts of interest are either ineffective or absent. Short selling reduces the effectiveness of analysts' favourable opinions in creating or sustaining overvalued stock prices, thus decreasing the incentives of institutional clients of brokerages to exert pressure on related analysts to initiate coverage and issue biased opinions. Using a difference‐in‐difference approach, we find strong evidence that stocks that are eligible for short sales experience a greater reduction in coverage by related analysts than stocks that are ineligible for short sales. When covered firms become eligible for short sales, the quality of forecasts and recommendations issued by related analysts improves considerably. Further analyses show that shortable firms with a significant reduction in related analysts' coverage are more likely to underperform and to experience stock price crashes in the future. Altogether, our results are consistent with short selling effectively restoring related analysts' independence in emerging markets.

Relative Valuation with Machine Learning

ABSTRACTWe use machine learning for relative valuation and peer firm selection. In out‐of‐sample tests, our machine learning models substantially outperform traditional models in valuation accuracy. This outperformance persists over time and holds across different types of firms. The valuations produced by machine learning models behave like fundamental values. Overvalued stocks decrease in price and undervalued stocks increase in price in the following month. Determinants of valuation multiples identified by machine learning models are consistent with theoretical predictions derived from a discounted cash flow approach. Profitability ratios, growth measures, and efficiency ratios are the most important value drivers throughout our sample period. We derive a novel method to express valuation multiples predicted by our machine learning models as weighted averages of peer firm multiples. These weights are a measure of peer–firm comparability and can be used for selecting peer‐groups.

Investment Decision Using Capital Asset Pricing Model (CAPM) in Indonesia’s Banking Sector

The focus of this research was to determine and investigate the application of the Capital Asset Pricing Modeling (CAPM) technique in analyzing investment decisions in particular banking stocks that specialize in digital banking operating models. Investors generally follow the IT or digital sector (Tech stocks) due to the sector's track record of delivering high returns and the promise for even greater returns in the future. In the banking sector, investors continue to pursue digital bank stocks as their holdings because they believe they may create value and expand. Six digital banking stocks were chosen for this study, all of which are listed on the Indonesian Stock Exchange and have an observation period of April 2021 to March 2022. These stocks are Bank Jago Tbk, Bank Neo Commerce Tbk, Bank Danamon Tbk, Bank Permata Tbk, Bank BTPN Tbk, and Bank OCBC NISP Tbk. This research uses linear regression analysis to determine the beta coefficient for the Capital Asset Pricing Modeling (CAPM) method and compares the expected return to the stock market's rate of return during the observation period in order to further differentiate between undervalued and overvalued stocks. The study found that two of the six digital banking companies had higher returns than expected (undervalued/efficient stocks), namely Bank Jago and Bank Neo Commerce, with the remaining four categorized as overvalued/inefficient.

Market misvaluation and corporate innovation: “Catering” or “risk aversion”?—Empirical evidence from China capital market

This paper tests how market misvaluation affects corporate innovation. Unlike the “catering effect” observed in the US, we find that estimated stock overvaluation in China is strongly negatively associated with corporate innovation, conforming to our “risk-aversion” hypothesis. In China, misvaluation affects innovation via finance and management behavior channels. The effect is more significant in non-state-owned corporations than in state-owned corporations. Stock turnover rate and ownership concentration play moderating roles in the effect. The evidence sheds light on the relationship between market risks and corporate innovation in an emerging market.

Misvaluation and the Asset Growth Anomaly

It is widely shown that stocks with higher asset growth paradoxically earn lower returns (hereafter, the asset growth anomaly). Studies have pointed towards errors in expectations, over‐investment and limits‐to‐arbitrage as potential causes of misvaluation, the most documented explanation of the asset growth anomaly. What studies have not yet done, however, is provide compelling evidence that mispricing is the cause of the anomaly. Using a multiples valuation approach to calculate a direct proxy of mispricing (i.e., a firm‐specific misvaluation level relative to peers), this study shows that the negative relation between asset growth and subsequent returns occurs in undervalued stocks, whereas it is absent in overvalued stocks. By comparing and contrasting the theories on real options and asset pricing, the findings suggest that the asset growth anomaly is driven by the real options component, particularly for undervalued firms. The findings therefore provide new evidence in the mispricing‐based hypothesis for the asset growth anomaly.

The role of hedge funds in the asset pricing: evidence from China

We document that hedge funds nurture mispricing in the Chinese financial market. We examine the relationship between hedge fund holdings and the degree of mispricing, assuming that hedge funds’ stock holdings are mainly for arbitrage and not for hedging. We also examine this relationship with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return of 1.78% per month, also impede the dissipation of stock mispricing. Furthermore, we find that trend-chasing may explain why hedge funds prefer to hold overvalued stocks. This research provides a new perspectives on the information content and potential investment value of hedge fund holdings in emerging markets.

Mutual Fund Risk Shifting and Risk Anomalies

Risk-shifting by underperforming funds increases their demand for risky stocks. We investigate its contribution to the well known risk anomalies: the apparent overvaluation of stocks with high beta, idiosyncratic volatility, and skewness. We show that these anomalies are concentrated among stocks mainly held by laggard funds. Exploiting the Morningstar methodology change in 2002, whereby its “star” ratings became based on relative performance within a style category rather than across the entire fund universe, we show that the beta anomaly is significant only when beta is measured against the S&P 500 index for the pre-2002 period and against the relevant category index for the post-2002 period. Using a demand system approach we find that removing holdings of the bottom performance quintile of funds substantially reduces the beta anomaly returns.

The Role of Hedge Funds in Asset Pricing: Evidence from China

We document that hedge funds nurture mispricing in the Chinese financial market. We exploit the relationship between hedge fund holdings and the degree of mispricing in case that hedge fund holdings of stocks are mainly for arbitrage purpose but not for hedging, and that with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return to 1.78% per month, also impede the dissipation of stock mispricing. Further, we find trend chasing may be the reason why hedge funds prefer to hold overvalued stocks. This research sheds new lights on the information content and potential investment value of hedge funds holdings in emerging markets.