Value Of Strategy Research Articles

The Concept of Productive Capital in Business Model Accounting and Integrated Reporting

Subject. This article explores the scope of the integrated reporting concept, which reflects the preservation of the value of production capital stock in the process of creating the value of a commercial organization. Objectives. The purpose of the article is to substantiate the hypothesis of preservation of the value of production capital, expressed in the business accounting model reflecting the processes of value creation and the influence on the stock of capital value. This statement of the problem is consistent with the concept of maintaining physical capital, as expressed in the conceptual framework of financial reporting. Methods. For the study, we used the methods of observation, abstraction, deduction and induction, stochastic and actual analyses of economic phenomena. Results. The study proves the need to distinguish between diametrically opposed accounting categories, such as wear and tear of fixed assets and depreciation of fixed assets. The first category should reflect the loss in the value of production capital stock. The second one should reflect the possibility of recovering financial losses, and the result of these accounting procedures should be reflected through the capital estimates. Conclusions and Relevance. The study concludes on the following: impairment of assets and liabilities is one of the methods of business model accounting, realized through the procedure of formation of fair value of assets and liabilities; the capital estimates reflect the possibility of maintaining the stock of the value of production capital when depreciation is considered as the possibility of financial capital to reimburse the value of losses in production capital. The approach proposed in the article to reflect accounting procedures related to the formation of capital estimates in financial statements not only corresponds to the concept of capital maintenance, but also allows to complete accounting records on reflecting the residual value of fixed assets.

Identifying Ecosystem Key Factors to Support Sustainable Water Management

There is a growing consensus that sustainable development requires a behavioral change, forced by firm decision-making. However, existing decision-supporting tools are unlikely to provide relevant information, hampered by the complexity of combined socio-economic and natural systems. Protecting the intrinsic value of ecosystems and providing sufficient natural resources for human use at the same time leads up to a wide span of management, ranging from species traits to governance. The aim of this study is to investigate the interactions between the natural and economic systems from the perspective of sustainable development. The way to reduce systems complexity by selecting key factors of ecosystem functioning for policy and management purposes is discussed. To achieve this, the Pentatope Model is used as a holistic framework, an ecosystem nodes network is developed to select key factors, and a combined natural and socio-economic valuation scheme is drawn. These key factors—abiotic resources and conditions, biodiversity, and biomass—are considered fundamental to the ecosystem properties habitat range and carrying capacity. Their characteristics are discussed in relation to sustainable water management. The conclusion is that sustainable development requires environmental decision-making that includes the intrinsic natural value, and should be supported by ecological modelling, additional environmental quality standards, and substance balances.

A RAROC Valuation Scheme for Loans and its Application in Loan Origination

In this article, a RAROC (risk-adjusted return on capital) valuation scheme for loans is derived. The critical assumption throughout the article is that no market information on a borrower’s credit quality like bond or credit default swap spreads is available. Therefore, market-based approaches are not applicable, and an alternative combining market and statistical information is needed. The valuation scheme aims to derive the individual cost components of a loan which facilitates the allocation to bank?s operational units. After its introduction, a theoretical analysis of the scheme linking the level of interest rates and borrower default probabilities shows that a bank should only originate a loan when the interest rate the borrower is willing to accept is inside the profitability range for this client. This range depends on a bank’s internal profitability target and is always a finite interval only or could even be empty if a borrower’s credit quality is too low. Aside from analyzing the theoretical properties of the scheme, we show how it can be directly applied in the daily loan origination process of a bank.

How Market Ecology Explains Market Malfunction

Standard approaches to the theory of financial markets are based on equilibrium and efficiency. Here we develop an alternative based on concepts and methods developed by biologists, in which the wealth invested in a financial strategy is like the abundance of a species. We study a toy model of a market consisting of value investors, trend followers and noise traders. We show that the average returns of strategies are strongly density dependent, i.e. they depend on the wealth invested in each strategy at any given time. In the absence of noise the market would slowly evolve toward an efficient equilibrium, but the statistical uncertainty in profitability (which is adjusted to match real markets) makes this noisy and uncertain. Even in the long term, the market spends extended periods of time away from perfect efficiency. We show how core concepts from ecology, such as the community matrix and food webs, give insight into market behavior. The wealth dynamics of the market ecology explain how market inefficiencies spontaneously occur and gives insight into the origins of excess price volatility and deviations of prices from fundamental values.

From studying the properties and functions of land and soil to assessing their ecosystem services: a review

The content of the article is based on the results of an analytical review of foreign and domestic scientific and applied research, as well as the author’s own developments on the specific features and the role of land and soil in the provision of ecosystem services. The latter are the benefits and goods that people receive as a result of the functioning and economic use of soil and land resources, contributing to the improvement of their well-being, as well as the sustainable existence of terrestrial ecosystems. The dualist role of land and soil performing, on the one hand, economic, environmental, sanitary and hygienic, territorial-organizational and other functions, on the other hand, being a recognized form of natural capital with an accumulated stock of value, is considered. It is proposed despite the physical unity of land and soil, when valuing them, be considered separately, determining the value of soil from the standpoint of their ecological functions, and the land – the spatial basis, life support and habitat, and also as an integral part of utility and profitability of land use. The possibilities of assessing land and soil ecosystem services are analysed on the basis of the concept of their common economic value and the prospects for applying its results in environmental management practice and statistical accounting of the natural capital.

Heterogeneous traders, house prices and healthy urban housing market: A DSGE model based on behavioral economics

A healthy urban housing market should be characterized by relative stability, which is reflected in reasonable fluctuations in housing prices. However, house prices in China have experienced rapid and prolonged growth of approximately twice that of people's disposable income since 2004. This growth can be attributed to the heterogeneous trading behaviors of value investors and domestic and foreign speculators. By constructing a Dynamic Stochastic General Equilibrium (DSGE) model based on the theory of behavioral economics, this study explores how fundamental and speculative investments affect housing prices and economic fluctuations in a market with heterogeneous traders. The devising of optimal macro-control policy is also discussed. Results show that speculators in the housing market explain the rapid rise and slow decline of house prices, which negatively affects a healthy housing market and its output. Excessive substitution effect between consumption and housing purchase resulting from the real estate boom also negatively affects the final output. The simulation experiments of policy intervention show that the combination of exchange rate regulation and property tax contributes to the stability of the housing market and macro-economy as a mix of short- and long-term policies. This paper holds that to ensure the economy's sustainable development in the new era, the central bank should implement market-oriented reforms of the exchange rate and lay out the landing of property tax properly.

Effects of rapid urbanization on ecological functional vulnerability of the land system in Wuhan, China: A flow and stock perspective

Exploring how rapid urbanization affects ecological functional vulnerability is a key issue in regional ecological risk assessment. This paper proposes a complex network approach to explore the response of ecological functional vulnerability to different urbanization scenarios from the perspective of stock and flow for the case study area of the Wuhan City in China. The paper aims to (1) establish a theoretical framework to explain how the urbanization process degrades ecological functions of the land system from a flow and stock perspective, (2) evaluate stock and flow changes of ecosystem service value triggered by land use change, and (3) explore the impact of different urbanization scenarios and different management costs on ecological functional vulnerability by combining two indicators, i.e., ecosystem service value change and ecological load entropy. Our results for Wuhan reveal that (1) non-ecological flows or degraded ecological flows are responsible for the increase in ecological functional vulnerability, (2) the total ecosystem service stock of the land system had slightly increased during 1990–2015, contributing to an enhanced ecological flow, (3) the critical points for maintaining the proper functioning of the land system are 80% or higher for cropland and 40% or higher for lake. These findings can provide critical references for the sustainable management of urban land system in Wuhan and other major cities in China. This study also suggest that the combination of ecosystem service value change and ecological load entropy can be used to comprehensively assess ecological functional vulnerability.

THE SHORT-TERM AND LONG-TERM TRADE-OFF BETWEEN RISK AND RETURN: CHAOS VS RATIONALITY

This paper used the composite construction method proposed by Haugen (1999) and its application by Zhao and Wang (2010) for the Chinese stock market. Utilizing the Shanghai A-share market stocks data, this paper first selected the shares listed on the Shanghai Stock Exchange during January 1, 1997 to December 31, 2017. A portfolio was then built according to the mean variance model of portfolio structure, and simulation results were analysed using the Wilcoxon Signed Rank Test. The relationship between risk and return in the long and short term was explored. Results indicated no significant relationship between the risk and return of the stock portfolio in the short run, which reflects the complexity of the Chinese stock market. However, in the long run, the risk and return of the stock portfolios are positively correlated, which means that high returns are accompanied by high risks, indicating that the stock market will eventually return to rationality. In other words, the A-share stock market will eventually return to be value-driven and the short-term speculators would be outweighed by long-term value investors.

Accounting for Economic Factors in Socio-Hydrology: Optimization under Uncertainty and Climate Change

This paper reframes the socio-hydrology analysis as an optimization problem. To achieve this, we first develop a valuation scheme to estimate net benefits of development in a flood plain, consisting of benefits obtained from land and housing, less the costs of flood management and flood damage. Then we look for an optimal safety factor for the levee heightening strategy within the ‘Technosociety’ scenario for a given time series of future flood events. This is further extended to finding an optimal strategy in the case of uncertainty concerning flood timings and intensities. We suggest an approach for both stationary and non-stationary evolution of flood dynamics and examine how the levee heightening strategy is affected by the magnitude of climate change. We find that the preferred management option depends strongly on the value of the land services the area provides.

Effect of Distillation Methods on Citronella Oil (Cymbopogon nardus) Content

Citronella grass (Cymbopogon nardus) is a permanently growing grass belonging to Poaceae grass family. Which plant is native to the tropical region, especially the south-eastern Asia regions. The Citronella oil is used wildly in industrial product as insect repellent, perfumery, cosmetic, diffusion aromatherapy and health benefit. The aim of this study was investigated the efficiency of distillation methods on citronella oil content by laboratory scale, modified alcohol boiler and extractor machine. In addition, possibility of Citronella oil was reviewed to further product development. The three distillations processing were compared on essential oil content that found the distillation method significantly influenced essential oil content (p<0.05). The extractor machine showed highest yield 6.85 ± 0.07 ml/Kg followed by laboratory scale 4.55 ± 0.31 ml/Kg and modified alcohol boiler 2.35 ± 0.16 ml/Kg. The possibility of product development was found citronella oil using on mosquito repellent is recommended at a concentrations of 5-10% and massage oil should not higher than 1.0%. The strong concentration can cause skin sensitivity. Therefore, the optimized concentration should be observed in product development, and value investing. \\

Explaining the Demise of Value Investing

It is widely believed that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge in the past 10-12 years. The reasons for this putative failure of value investing elude investors and academics, making it a challenge to assess the likelihood of the return of value investing to its days of glory. Based on extensive data analysis we show that value investing has generally been unprofitable for almost 30 years, barring a brief resurrection following the dotcom bust. We identify two major reasons for the failure of value investing: (1) accounting deficiencies causing systematic misidentification of value, and particularly of glamour (growth) stocks, and (2) fundamental economic developments which slowed down significantly the reshuffling of value and glamour stocks (mean reversion) which drove the erstwhile gains from the value strategy. We end up by identifying the type of companies (stocks) that may still generate gains from value investing.

Strategic approaches to value investing: a systematic literature review of international studies

PurposeThis paper aims to present a systematic literature review (SRL) on the topic of value investing (VI) in the international studies. The purpose of this study is twofold: to highlight the strategic approaches followed in recent contributions in the field of finance connected to the main approaches of the pioneering authors (Graham and Dodd, 1934; Fisher, 1958; Fama and French, 1992; Lakonishok, Shleifer and Vishny, 1994) who have investigated VI; and to analyse whether scholars follow a qualitative approach in studying VI that enables companies to achieve greater competitive advantage..Design/methodology/approachFrom a SLR of peer-reviewed papers covering the period 2007-2017, 45 papers were identified and analysed to present a better understanding of the adopted approaches and methodologies compared to the pioneering contributions on the topic.FindingsThis search found that 24 out of 45 papers specifically analyse VI. In particular, this work highlights 20 out of 24 papers that directly or indirectly, follow the approaches of “Graham and Dodd” or “Lakonishok, Shleifer and Vishny”/“Fama and French”, and 4 out of 24 that do not follow one of the main approaches identified. After the descriptive findings of the review, this paper highlights that none of the contributions takes into account qualitative analysis of a company to define whether the firm itself does or does not have a sustainable competitive advantage.Practical implicationsThis paper suggests to international investors who intend to invest in one or more markets to revise the basic principles of VI, while also considering qualitative elements related to strategic aspects and behavioural finance. In particular, this study suggests that the investor introduce a qualitative analysis to allocate equity in value firms with a lasting competitive advantage.Originality/valueThis study contributes to advance the knowledge of VI from a theoretical point of view. To the best of the authors’ knowledge, it is the first study that systematises the international literature on this topic by highlighting the main contributions written in the period 2007-2017, analysing the development of the pioneering strategic approaches and examining their method of assessing firms.

Glamour among value: P/E ratios and value investor attention

AbstractThe trailing‐four‐quarter price–earnings (P/E) ratio is the most popular fundamental value proxy. This article is the first to examine the P/E ratio as the preeminent measure of value investor attention. Trailing‐four‐quarter P/E ratios predict significantly greater cross‐sectional variation in stock returns than lagged P/E ratios or current price‐to‐book (P/B) ratios. P/E strategy returns are robust to variables that proxy for fundamental risk, variables mechanically related to P/E ratios, relative trading volume, and liquidity. The role of attention is evident in return patterns across long and short portfolios, day of the week, and time since formation. Stocks with low P/E ratios exhibit an increase in total trading volume driven by small trades, an improvement in liquidity, and lower idiosyncratic volatility. These patterns are consistent with the typical trading activity of individual investors, who have the strongest attention constraints.

Valuing firm’s financial flexibility under default risk and bankruptcy costs: a WACC based approach

PurposeThe purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.Design/methodology/approachThe authors assume that the total debt of the firm is a combination of two debt components. The first component is an active debt component which is assumed to be proportional to the firm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the firm’s capital structure more realistic and allows us to include flexibility into the firm’s debt structure management. The firm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.FindingsThe model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.Research limitations/implicationsThe proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.Practical implicationsThis model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.Originality/valueTo the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

New Theory and Evidence on the Value Investors Ascribe to Higher-Quality Financial Reporting and Quality-Revealing Audit Reports

We present new theory and experimental findings indicating that investors ascribe value to firms that use higher financial-reporting quality (FRQ), controlling for the influence of higher FRQ on their estimates of these firms’ fundamental value. To guide our investigation, we draw on the cooperation literature in accounting, finance and psychology. We identify expanded audit reports, particularly auditor commentary, as a mechanism that credibly communicates whether a firm uses higher FRQ. Auditor commentary increases investors’ willingness to pay (WTP) more to own shares of a firm using higher FRQ than a competing firm using lower FRQ. We also provide process evidence that investors perceive higher FRQ as cooperative behavior by measuring their affective responses and cognitive beliefs, which mediate the influence of audit commentary on investors’ increased WTP for higher FRQ. A second experiment bolsters the link between investors’ affective and cognitive responses to a firm’s FRQ and perceived cooperative behavior. Overall, we contribute to the accounting literature by motivating a reinterpretation of studies on value relevance and mispricing. We also provide theory and evidence that there is greater value in expanded audit reports than previously understood, and this value likely has standard-setting and audit-pricing implications.

Valuation of distributed energy resources in active distribution networks

In concert with the transformation of conventional passive power distribution system, distributed energy resources (DERs) have progressively become participants in the provision of electricity services in active distribution networks (ADNs). In this paper, we propose a systematic valuation process to quantify the value of DERs in the ADN context. The paper first provides comprehensive insights into the impacts of DERs on ADN and the society as a whole. Given the technological, locational, and temporal diversity of DERs, a two-part scheme is developed to value and compensate DER portfolios proposed by customers and independent third parties. In particular, DERs are valued for their benefits and costs in both short and long terms. An integrated resource planning model is formulated to quantify the value of a given DER portfolio to be installed, where bi-level optimization techniques are applied to coordinate decisions on ADN planning and operations. In order to determine the short-term operation benefits of the DER portfolio on a continuous basis, a retail market operation model is developed based on peer-to-peer energy transactions among prosumers, when the impacts of DERs on ADN operations are monetized by distribution locational marginal prices. It is finally concluded in the paper that the proposed valuation scheme will not only contribute to the proactive investment of DERs in ADN but also help enhance the role of DERs in offering affordable, reliable, resilient and sustainable electricity services to customers.

Practical Applications of Artificial Intelligence and Value Investing

Practical Applications Summary In Artificial Intelligence and Value Investing, from the Spring 2018 issue of The Journal of Investing, author Korok Ray (an associate professor of accounting at Texas A&M) explores the possibilities of utilizing artificial intelligence (AI) as both the primary theoretical apparatus for data processing and as a reasoning agent for value investing. He describes the particular kinds of advancements needed in the AI field to perform classic value-style investing and briefly considers the long-term consequences of its use on the efficiency of capital markets. Ray explores the application of AI to value investing first by defining how AI functions, then by examining AI through three domains: searching, learning, and reasoning. Ray also advocates for cooperation between the fields of finance and computer science and urges the investing community to embrace, rather than resist, the application of AI. TOPICS:Big data/machine learning, fundamental equity analysis

Spatial assessment of habitat conservation status in a Macaronesian island based on the InVEST model: a case study of Pico Island (Azores, Portugal)

A methodological approach for the conservation status assessment of Azorean natural habitats in Pico Island (Portugal) is presented, using the InVEST Habitat Quality model. This spatial analysis-based study was focused on a selected group of 33 endemic plant species occurring in Pico Island and protected under the Habitats Directive’s Listed Habitats for Macaronesia Region. The InVEST model combines information present in a Land Cover map with data on threats to habitats and habitats response, producing habitat quality and degradation maps as outputs, both represented in a score ranging from 0 to 1. Results showed that at higher altitudes habitats present better quality status, mostly due to the absence of the main threats such as Invasive Alien Species and Pasturelands. The study also showed that most areas with higher conservation quality are covered by the Pico Island Natural Park (a set of protected areas). Habitat patches showing higher degradation levels are located outside of the protected areas, supporting the increasing need for an integrated island-based conservation approach. This model valuation scheme might be used as an effective decision-support tool to prioritise areas for conservation actions and management in all nine Azorean Island Natural Parks, as well as in other small Macaronesian islands.

Investigating Long Short-Term Memory Neural Networks for Financial Time-Series Prediction

Stock prices are co-integrated with fundamental valuation factors (earnings, revenue, cash flow, etc.). This has allowed legendary value investors such as Warren Buffett to enjoy tremendous investment success over the long-term. However, the market is efficient at discounting past information and consensus future expectations. Having the ability to read non-obvious information and to have a better prediction at future valuation factors (surprises from consensus estimates) would likely lead to investment outperformance (generating alpha returns) over the long run. In a recently published work, Alberg and Lipton used various artificial neural networks (ANN) to predict companies’ valuation ratios from their historical fundamental factors and suggested promising results. Aligned with this thought, this research project aims at using Long Short-Term Memory (LSTM) neural network, a type of recurrent neural network (RNN), to predict future fundamental valuation factors of companies and then test investment results by applying active risk-return optimized portfolio strategies. The reasons for choosing LSTM network for this study are the following: (1) like a deep neural network, LSTM is a flexible universal function approximator suited for time-series forecast; (2) LSTM, unlike vanilla version of RNN, does not suffer from “vanishing gradient problem” and is well suited in discovering long-range characteristics, hence its name. Given that LSTM network (or deep neural network in general) enjoys a reputation of being prone to over-fitting to in-sample data, we spend a significant amount of efforts in studying the over-fitting behavior and try to lay out systematic procedures in detecting and mitigating such issues. The current work gives us confidence and excitement that much more can be explored to potentially further improve the prediction performance and investment returns.

The Market Value of Inventory

This paper investigates how supply chain management (SCM) efficiency affects the value investors attach to the change in a company’s inventory holdings. Based on a large number of U.S. firms from 1971 to 2013, we find that, on average, one dollar of inventory change is valued at $0.507 in the stock market. Decomposition into normal and abnormal inventory changes reveals that the market value of one dollar of abnormal inventory change is 43% smaller than that of normal inventory change, where a normal change moves the inventory balance to an estimated optimal level, and an abnormal change refers to the gap between actual inventory change and the estimated optimal change. We also investigate inventory turnover and gross margin and find economically and statistically significant relations between these proxies for efficient SCM and the value the market attaches to inventory changes. Finally, we find that the market attaches a higher value to inventory changes of firms with better growth prospects, higher sales predictability, and tighter financial constraints.