Valuation Metrics Research Articles

Book Review: Business Essentials for Strategic Communicators: Creating Shared Value for the Organization and Its Stakeholders, by Matthew W. Ragas and Ron Culp

Matthew W. Ragas and Ron Culp Business Essentials for Strategic Communicators: Creating Shared Value for the Organization and Its Stakeholders. Palgrave McMillan: New York, 2014. 211 pp.Competition for entry-level jobs in strategic communication will remain competitive, as more than 51,0 00 undergraduates are enrolled in public relations, advertising, and strategic communication programs in the United States. Business Essentials for Strategic Communicators provides a broad overview of the knowledge communications majors need to navigate the future of corporate communication.The first chapter describes the transformation of the public relations practitioner's role from that of technician responsible simply for shaping the company message to that of strategic advisor responsible for developing the message and influencing organizational decisions. Much of the chapter presents results of the authors' studies-including one sponsored by the Arthur W. Page Society. For example, 8 out of 10 corporate executives reported undergraduates lack essential knowledge despite the Commission on Public Relations Education's (CPRE) recommendation of undergraduate and graduate courses in accounting, economics, management, marketing, and finance.The ability to understand income statements, balance sheets, cash flow, and shareholder equity is requisite for success. Citing a study of salaries, the authors report MBAs earning higher salaries than professionals with master's degrees from strategic communication programs. The authors emphasize for the future strategic communicator, communications acumen is secondary to acumen. Chapter 1 concludes that business 101 is essential not only for corporate careers but also for nonprofit and government careers.Chapter 2 provides an overview of economics, the Federal Reserve, and key economic indicators. Ragas and Culp, professors at DePaul University in Chicago, explain that strategic communicators require a working knowledge of the consumer price index, currency exchange rates, U.S. treasury bond rates, Gallup's economic confidence index, and the Thomson Reuters/University of Michigan consumer sentiment index, as well as spending and forecasting trends in advertising and marketing like ZenithOptimedia and Nielsen.The importance of Wall Street and the financial and stock markets is covered in Chapter 3. The authors give the reader an overview of stock valuations and the impact of the securities and bond markets on the corporate bottom line. The chapter sketches the differences among the primary U.S. stock exchanges and explains initial public offerings and the role of the Securities and Exchange Commission (SEC) in financial communication with stakeholders. Chapter 3 concludes with a brief overview of exchanges in other countries and identification of the players in the financial markets including investment banks, federal and state regulators, institutional and individual investors, information intermediaries, and proxy advisers to name a few.Accounting and its role in corporate record keeping and reporting are the focus of the book's fourth chapter. Income statements, balance sheets, and cash flow statements are defined, and sample income statements and balance sheets are presented in the chapter's tables. Chapter 4 concludes with an explanation of financial valuation metrics such as market capitalization and price-to-earnings ratios. Each chapter concludes with key terms and discussion questions. A 22-page glossary appears at the end of the book.Strategic communicators need to understand corporate law and disclosure as well as the relationship between the company and the SEC. Chapter 5 presents a brief historical overview of SEC regulations for public companies and defines material information and insider trading. The overview also includes corporate disclosure theories and research and corporate disclosure channels including earnings conference calls and investment conferences. …

Analysis of the uncertainty in the monetary valuation of ecosystem services — A case study at the river basin scale

Ecosystem services provide multiple benefits to human wellbeing and are increasingly considered by policy-makers in environmental management. However, the uncertainty related with the monetary valuation of these benefits is not yet adequately defined or integrated by policy-makers. Given this background, our aim was to quantify different sources of uncertainty when performing monetary valuation of ecosystem services, in order to provide a series of guidelines to reduce them. With an example of 4 ecosystem services (i.e., water provisioning, waste treatment, erosion protection, and habitat for species) provided at the river basin scale, we quantified the uncertainty associated with the following sources: (1) the number of services considered, (2) the number of benefits considered for each service, (3) the valuation metrics (i.e. valuation methods) used to value benefits, and (4) the uncertainty of the parameters included in the valuation metrics. Results indicate that the highest uncertainty was caused by the number of services considered, as well as by the number of benefits considered for each service, whereas the parametric uncertainty was similar to the one related to the selection of valuation metric, thus suggesting that the parametric uncertainty, which is the only uncertainty type commonly considered, was less critical than the structural uncertainty, which is in turn mainly dependent on the decision-making context. Given the uncertainty associated to the valuation structure, special attention should be given to the selection of services, benefits and metrics according to a given context.

Forest biomass energy: assessing atmospheric carbon impacts by discounting future carbon flows

AbstractAlthough forest biomass energy was long assumed to be carbon neutral, many studies show delays between forest biomass carbon emissions and sequestration, with biomass carbon causing climate change damage in the interim. While some models suggest that these primary biomass carbon effects may be mitigated by induced market effects, for example, from landowner decisions to increase afforestation due to higher biomass prices, the delayed carbon sequestration of biomass energy systems still creates considerable scientific debate (i.e., how to assess effects) and policy debate (i.e., how to act given these effects). Forests can be carbon sinks, but their carbon absorption capacity is finite. Filling the sink with fossil fuel carbon thus has a cost, and conversely, harvesting a forest for biomass energy – which depletes the carbon sink – creates potential benefits from carbon sequestration. These values of forest carbon sinks have not generally been considered. Using data from the 2010 Manomet Center for Conservation Sciences ‘Biomass sustainability and carbon policy study’ and a model of forest biomass carbon system dynamics, we investigate how discounting future carbon flows affects the comparison of biomass energy to fossil fuels in Massachusetts, USA. Drawing from established financial valuation metrics, we calculate internal rates of return (IRR) as explicit estimates of the temporal values of forest biomass carbon emissions. Comparing these IRR to typical private discount rates, we find forest biomass energy to be preferred to fossil fuel energy in some applications. We discuss possible rationales for zero and near‐zero social discount rates with respect to carbon emissions, showing that social discount rates depend in part on expectations about how climate change affects future economic growth. With near‐zero discount rates, forest biomass energy is preferred to fossil fuels in all applications studied. Higher IRR biomass energy uses (e.g., thermal applications) are preferred to lower IRR uses (e.g., electricity generation without heat recovery).

The Valuation of Social Media Public Companies: There Is a Method to This Madness!

The valuations of exchange listed social media companies have for long defied established corporate finance metrics and (in many instances) common sense. Besides highlighting theoretical and practical challenges related to valuing social media companies, this paper revisits the valuation metrics of all the global social media companies making up the most established social media benchmark (the Solactive Social Media Index, “SOCL”). The paper also reviews the investment case for social media against the backdrop of other equity markets. Thus far, global social media stocks have underperformed both the broad U.S. equity index (the Standard & Poor’s 500) and its technology subset (the NASDAQ Composite), while demonstrating a relatively high degree of volatility. Despite ongoing convergence with the broad U.S. equity universe, SOCL’s valuations indicate substantial premia over the Standard & Poor’s 500. This leads us to believe that any successful investment strategy focused on social media should be highly selective (based on stock picking rather than composite exposure to the industry).

The Dynamics of Value Across Global Equity Markets: The Risk Contagion

The ratio between the share price and current earnings per share, the PE ratio, is widely considered to be an effective gauge of under/overvaluation of a corporation’s stock. Arguably, a more reliable indicator, the Cyclically-Adjusted Price Earning ratio or CAPE, can be obtained by replacing current earnings with a measure of permanent earnings i.e. the profits that a corporation is able to earn, on average, over the medium to long run. In this study, we aim to understand the cross-sectional aspects of the dynamics of the valuation metrics across global stock markets including both developed and emerging markets. We use a time varying DCC model to exploit the dynamics in correlations, by introducing the notion of value spread between CAPE and the respective Market Index from 2002 to 2014 for 34 countries. We find periods, notably around the 2008 financial crisis, when the value spread shows large degree of variation and thus provide a statistically significant signal for the asset allocation. The signal can be utilized for better asset allocation as it allows one to interpret the common movements in the stock market for under/overvaluation trends. These estimates clearly indicate periods of misvaluation in our sample. Furthermore, our simulations suggest that the model would have been able to provide early warning signs of misvaluation in real time on a global scale and formation of asset bubbles.

Customer Relationship Malevolence: A Reflection on Accounting, Marketing and Customer Valuation

Ideas centring on knowing and understanding the customer have been core concerns of business since the 1960s. As a result, several attempts to understand the customer have been devised, leading to the generation of data collection systems and calculative technologies that try to provide numerical understanding of the customer, which now lies at the heart of contemporary customer management schemes. However, these technologies can produce several social consequences. This paper discusses valuation metrics used in customer management systems and outlines the negative issues that can result from widespread usage.

A Pragmatist's Guide to Long-Run Equity Returns, Market Valuation, and the CAPE

When practitioners evaluate the equity market, two important questions recur. What long-run returns should investors expect? And, are there fundamental yardsticks that reliably indicate when the market is overvalued? Researchers have not reached a consensus on either of these questions. Equity prices have been high relative to their historical average, which has led many analysts to predict future equity returns will be below their historical average. Forecasts for real returns vary widely, however, from as low as 2%, to approximately 6%, which is close to the 6.5% average since 1871. Disagreements about returns reflect disagreement about how earnings will be affected by slower GDP growth, lower dividends, share buybacks, and the profitability of retained earnings. The current paper introduces Federal Reserve Flow of Funds and S&P500 book value data into this debate, and these data are generally supportive of the optimistic forecasts for equity returns. Estimates of long-run returns have implications for valuation metrics such as Shiller’s CAPE (cyclically adjusted price-earnings ratio).

Quantitative accounting for social economic indicators

AbstractIn this paper we consider the evolution of quantitative accounting of social indicators for measuring societal progress and sustainable development, with particular reference to economic analysis and social indicators. We examine the use of the System of National Accounts and introduce the concept of using input‐output analysis for the development of social indicators. The use of satellite accounts for input‐output analysis of environmental impacts and the development of environmental footprints has been well documented. The novelty of this paper is the use of a methodology frequently used to develop environmental indicators to quantify social impacts and to further the development of social footprints. We provide a case study of the use of social satellite accounts for labour, using multi‐regional input‐output analysis to develop a global inequality footprint for labour embodied in trade, and argue the case for the development of a system of social economic accounts, similar to the System of Environmental‐Economic Accounts adopted by the United Nations Statistical Commission in 2012. This work contributes to the development of social valuation metrics as a means for measuring societal progress and developing sustainability indicators for use in management and decision‐making.

Estimating the health effects of greenhouse gas mitigation strategies: addressing parametric, model, and valuation challenges.

Background: Policy decisions regarding climate change mitigation are increasingly incorporating the beneficial and adverse health impacts of greenhouse gas emission reduction strategies. Studies of such co-benefits and co-harms involve modeling approaches requiring a range of analytic decisions that affect the model output.Objective: Our objective was to assess analytic decisions regarding model framework, structure, choice of parameters, and handling of uncertainty when modeling health co-benefits, and to make recommendations for improvements that could increase policy uptake.Methods: We describe the assumptions and analytic decisions underlying models of mitigation co-benefits, examining their effects on modeling outputs, and consider tools for quantifying uncertainty.Discussion: There is considerable variation in approaches to valuation metrics, discounting methods, uncertainty characterization and propagation, and assessment of low-probability/high-impact events. There is also variable inclusion of adverse impacts of mitigation policies, and limited extension of modeling domains to include implementation considerations. Going forward, co-benefits modeling efforts should be carried out in collaboration with policy makers; these efforts should include the full range of positive and negative impacts and critical uncertainties, as well as a range of discount rates, and should explicitly characterize uncertainty. We make recommendations to improve the rigor and consistency of modeling of health co-benefits.Conclusion: Modeling health co-benefits requires systematic consideration of the suitability of model assumptions, of what should be included and excluded from the model framework, and how uncertainty should be treated. Increased attention to these and other analytic decisions has the potential to increase the policy relevance and application of co-benefits modeling studies, potentially helping policy makers to maximize mitigation potential while simultaneously improving health.Citation: Remais JV, Hess JJ, Ebi KL, Markandya A, Balbus JM, Wilkinson P, Haines A, Chalabi Z. 2014. Estimating the health effects of greenhouse gas mitigation strategies: addressing parametric, model, and valuation challenges. Environ Health Perspect 122:447–455; http://dx.doi.org/10.1289/ehp.1306744

Quantifying Preferences for the Natural World Using Monetary and Nonmonetary Assessments of Value

Given that funds for biodiversity conservation are limited, there is a need to understand people’s preferences for its different components. To date, such preferences have largely been measured in monetary terms. However, how people value biodiversity may differ from economic theory, and there is little consensus over whether monetary metrics are always appropriate or the degree to which other methods offer alternative and complementary perspectives on value. We used a choice experiment to compare monetary amounts recreational visitors to urban green spaces were willing to pay for biodiversity enhancement (increases in species richness for birds, plants, and aquatic macroinvertebrates) with self-reported psychological gains in well-being derived from visiting the same sites. Willingness-to-pay (WTP) estimates were significant and positive, and respondents reported high gains in well-being across 3 axes derived from environmental psychology theories (reflection, attachment, continuity with past). The 2 metrics were broadly congruent. Participants with above-median self-reported well-being scores were willing to pay significantly higher amounts for enhancing species richness than those with below-median scores, regardless of taxon. The socio-economic and demographic background of participants played little role in determining either their well-being or the probability of choosing a paying option within the choice experiment. Site-level environmental characteristics were only somewhat related to WTP, but showed strong associations with self-reported well-being. Both approaches are likely to reflect a combination of the environmental properties of a site and unobserved individual preference heterogeneity for the natural world. Our results suggest that either metric will deliver mutually consistent results in an assessment of environmental preferences, although which approach is preferable depends on why one wishes to measure values for the natural world.

Practical Applications of Analyzing Valuation Measures: A Performance Horse Race over the Past 40 Years

Choosing a valuation metric is critical and controversial. Those chosen by the academic research community have typically differed from the choices preferred by practitioners. It is unclear from an empirical viewpoint why investors favor different metrics, according to <b>Wesley R. Gray</b>, an Assistant Professor of Finance at Drexel University’s LeBow College of Business and co-author of <i><b>Analyzing Valuation Measures: A Performance Horse Race over the Past 40 Years</b></i>, which was published in the Fall 2012 issue of <i><b>The Journal of Portfolio Management</b></i>. The article, co-authored with <b>Jack Vogel</b>, explores a wide range of pricing metrics, all expressed in yield format. Vogel is a fourth-year PhD student in the Finance Department at Drexel. This Practical Applications report highlights the most popular pricing metrics and identifies the best-performing valuation metric revealed in the article. And the winner is…

Assessment of the water supply:demand ratios in a Mediterranean basin under different global change scenarios and mitigation alternatives

Spatial differences in the supply and demand of ecosystem services such as water provisioning often imply that the demand for ecosystem services cannot be fulfilled at the local scale, but it can be fulfilled at larger scales (regional, continental). Differences in the supply:demand (S:D) ratio for a given service result in different values, and these differences might be assessed with monetary or non-monetary metrics. Water scarcity occurs where and when water resources are not enough to meet all the demands, and this affects equally the service of water provisioning and the ecosystem needs. In this study we assess the value of water in a Mediterranean basin under different global change (i.e. both climate and anthropogenic changes) and mitigation scenarios, with a non-monetary metric: the S:D ratio. We computed water balances across the Ebro basin (North-East Spain) with the spatially explicit InVEST model. We highlight the spatial and temporal mismatches existing across a single hydrological basin regarding water provisioning and its consumption, considering or not, the environmental demand (environmental flow). The study shows that water scarcity is commonly a local issue (sub-basin to region), but that all demands are met at the largest considered spatial scale (basin). This was not the case in the worst-case scenario (increasing demands and decreasing supply), as the S:D ratio at the basin scale was near 1, indicating that serious problems of water scarcity might occur in the near future even at the basin scale. The analysis of possible mitigation scenarios reveals that the impact of global change may be counteracted by the decrease of irrigated areas. Furthermore, the comparison between a non-monetary (S:D ratio) and a monetary (water price) valuation metrics reveals that the S:D ratio provides similar values and might be therefore used as a spatially explicit metric to valuate the ecosystem service water provisioning.

Quality of Net Income vs. Total Comprehensive Income in the Context of IAS/IFRS Regulation

Research in accounting has thus far attempted to provide fair and useful financial performance measures for a wide range of users. Academics and professionals have also established income as the key performance measures in making economic decisions. The purpose of this study is to investigate the quality of total comprehensive income (TCI) relative to net income (NI), prepared in accordance with International Financial Reporting Standards (IAS/IFRS). Using a data set covering 2,273 firms from 22 countries in Europe, Asia and Australia between 2006 and 2010, we provided evidence that net income always dominates comprehensive income as a valuation metric. The findings indicated that NI is more value relevant than TCI in predicting the future operating cash flows and income. In addition, NI is more persistent and timely, and explains the actual operating cash flows more precise than TCI. Accruals linked to NI have also better quality than those related to TCI. However, we found that TCI is less smoothing and more conservative than NI. These results do not support the claim that income measured on a comprehensive basis is a better measure of firm performance than NI. These results raise the questions about the usefulness of mandating TCI in IAS/IFRS regulation. Our findings, therefore, should be of interest to IASB, as they provide evidence of fewer quality of the TCI. Perhaps it is time for the IASB to reconsider other comprehensive income components and focus on items included in other comprehensive income to improve the quality of the TCI metric. These results also provide evidence of net income as a primary decision-relevant metric.

On the Performance of Cyclically Adjusted Valuation Measures

We confirm the effectiveness of using cyclically-adjusted valuation metrics to identify high performing stocks. The Shiller P/E, or cyclically-adjusted price-to-earnings (CAPE) ratio, is not the optimal way to implement a cyclically-adjusted value measure. At the margin, the cyclically-adjusted book-to-market (CA-BM) is a better measure to predict returns. We find that more frequent rebalancing and momentum can enhance strategies based on cyclically-adjusted valuation metrics.

Testing the Performance of Graham’s Net Current Asset Value Strategy in Indian Stock Market

Using the data on stocks listed on Bombay Stock Exchange (BSE) for the period spanning from 1996 to 2010, the present study intends to examine the relevance of stock selection based on net current asset value rule of Benjamin Graham in Indian capital market. This valuation metric is aimed at buying the securities whose prices are lesser than the net current assets of the company. The returns derived from the stocks meeting the criterion are analysed using one sample t-test, capital asset pricing model (CAPM). The results revealed that the portfolio selected on the basis of this criterion provided significantly positive mean market adjusted returns in maximum number of years when the holding period of the portfolio is extended from 12 months to 24 months. The significant abnormal returns derived through CAPM model, however, cannot be considered conclusive due to lesser explanatory power of the model. Nevertheless, the portfolio showed lesser volatility than the market portfolio, thereby implying that the fund managers can also use it as an investment tool for risk management due to lesser risk and positive market adjusted returns.

Merger Performance and Antitrust Review: A Retrospective Analysis

Many empirical studies have shown negative abnormal returns to occur shortly after a once promising merger is consummated. There are few consistent explanations for the poor performance of so many mergers. This article considers mergers of concern to antitrust authorities to examine how structural factors, including market concentration and R&D intensity, as well as valuation metrics, such as merger premiums and merger waves, affect abnormal returns. Our results suggest that acquirer R&D intensity, market concentration of the deal premium, and deal size have a negative impact, whereas the target's intangible asset intensity and the presence of a merger wave positively influence merger performance.

Retirement Village Resident Duration: An Empirical Analysis

In Australia, retirement villages are occupied under a number of tenures of which the common feature is the fee structure whereby a resident initially purchases their right to occupy and at the end of their tenure pays an amount based on variable factors to the owner/operator of the village. As the owner/operator receives their return at the end of residents’ tenure, the return can only be estimated based on projections including the tenure of the resident and increase in sale price of units. This paper presents original research into valuation metrics including the length of resident tenure (duration) over a 27 year period.

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.

Double auction-inspired meta-scheduling of parallel applications on global grids

Meta-schedulers map jobs to computational resources that are part of a Grid, such as clusters, that in turn have their own local job schedulers. Existing Grid meta-schedulers either target system-centric metrics, such as utilisation and throughput, or prioritise jobs based on utility metrics provided by the users. The system-centric approach gives less importance to users’ individual utility, while the user-centric approach may have adverse effects such as poor system performance and unfair treatment of users. Therefore, this paper proposes a novel meta-scheduler, based on the well-known double auction mechanism that aims to satisfy users’ service requirements as well as ensuring balanced utilisation of resources across a Grid. We have designed valuation metrics that commodify both the complex resource requirements of users and the capabilities of available computational resources. Through simulation using real traces, we compare our scheduling mechanism with other common mechanisms widely used by both existing market-based and traditional meta-schedulers. The results show that our meta-scheduling mechanism not only satisfies up to 15% more user requirements than others, but also improves system utilisation through load balancing.

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.