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Author: Tjomme O. Rusticus
Publisher:
ISBN:
Category :
Languages : en
Pages : 79
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Book Description
In this paper, I examine the impact of market inefficiency on the properties of implied cost of capital (ICC) estimates. I show that market inefficiency will bias the relation between the ICC estimate and future returns upwards. Utilizing recently developed ICC estimates formed using regression based earnings forecasts, I show that a substantial portion of the returns to an ICC trading strategy stem from mispricing rather than expected returns. The biases induced by mispricing are most severe for firms with significant limits to arbitrage and less severe for firms that are larger, more liquid, and have lower transaction costs, and for ICC estimates based on adjusted analyst forecasts. In addition, I find that controlling for earnings and discount rate news is not an effective control for mispricing, but that controlling for earnings announcement returns is at least partially effective.
Author: Tjomme O. Rusticus
Publisher:
ISBN:
Category :
Languages : en
Pages : 79
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Book Description
In this paper, I examine the impact of market inefficiency on the properties of implied cost of capital (ICC) estimates. I show that market inefficiency will bias the relation between the ICC estimate and future returns upwards. Utilizing recently developed ICC estimates formed using regression based earnings forecasts, I show that a substantial portion of the returns to an ICC trading strategy stem from mispricing rather than expected returns. The biases induced by mispricing are most severe for firms with significant limits to arbitrage and less severe for firms that are larger, more liquid, and have lower transaction costs, and for ICC estimates based on adjusted analyst forecasts. In addition, I find that controlling for earnings and discount rate news is not an effective control for mispricing, but that controlling for earnings announcement returns is at least partially effective.
Author: Peter Easton
Publisher: Now Publishers Inc
ISBN: 1601981945
Category : Business & Economics
Languages : en
Pages : 148
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Book Description
Estimating the Cost of Capital Implied by Market Prices and Accounting Data focuses on estimating the expected rate of return implied by market prices, summary accounting numbers, and forecasts of earnings and dividends. Estimates of the expected rate of return, often used as proxies for the cost of capital, are obtained by inverting accounting-based valuation models. The author describes accounting-based valuation models and discusses how these models have been used, and how they may be used, to obtain estimates of the cost of capital. The practical appeal of accounting-based valuation models is that they focus on the two variables that are commonly at the heart of valuations carried out by equity analysts -- forecasts of earnings and forecasts of earnings growth. The question at the core of this monograph is -- How can these forecasts be used to obtain an estimate of the cost of capital? The author examines the empirical validity of the estimates based on these forecasts and explores ways to improve these estimates. In addition, this monograph details a method for isolating the effect of any factor of interest (such as cross-listing, fraud, disclosure quality, taxes, analyst following, accounting standards, etc.) on the cost of capital. If you are interested in understanding the academic literature on accounting-based estimates of expected rate of return this monograph is for you. Estimating the Cost of Capital Implied by Market Prices and Accounting Data provides a foundation for a deeper comprehension of this literature and will give a jump start to those who have an interest in these topics. The key ideas are introduced via examples based on actual forecasts, accounting information, and market prices for listed firms, and the numerical examples are based on sound algebraic relations.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 178
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Book Description
Author: Jan A. Kempkes
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Luboš Pástor
Publisher:
ISBN:
Category : Capital investments
Languages : en
Pages : 72
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Book Description
We reexamine the time-series relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G-7 countries. We find strong support for a positive intertemporal mean-variance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G-7 financial markets.
Author: Charles Lee
Publisher: Now Publishers
ISBN: 9781601988928
Category : Business & Economics
Languages : en
Pages : 212
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Book Description
Alphanomics: The Informational Underpinnings of Market Efficiency is intended to be a compact introduction to academic research on market efficiency, behavioral finance, and fundamental analysis and is dedicated to the kind of decision-driven and prospectively-focused research that is much needed in a market constantly seeking to become more efficient. The authors refer to this type of research as Alphanomics, the informational economics behind market efficiency. Alpha refers to the abnormal returns, which provide the incentive for some subpopulation of investors to engage in information acquisition and costly arbitrage activities. Nomics refers to the economics of alpha extraction, which encompasses the costs and incentives of informational arbitrage as a sustainable business proposition. Some of the questions that are addressed include: why do we believe markets are efficient?; what problems have this belief engendered?; what factors can impede and/or facilitate market efficiency?; what roles do investor sentiment and costly arbitrage play in determining an equilibrium level of informational efficiency?; what is the essence of value investing?; how is it related to fundamental analysis (the study of historical financial data)?; and how might we distinguish between risk and mispricing based explanations for predictability patterns in returns? The first two sections review the evolution of academic thinking on market efficiency and introduce the noise trader model as a rational alternative. Section 3 surveys the literature on investor sentiment and its role as a source of both risks and returns. Section 4 discusses the role of fundamental analysis in value investing. Section 5 reviews the literature on limits to arbitrage, and section 6 discusses research methodology issues associated with the need to distinguish mispricing from risk.
Author: Ling Lei
Publisher:
ISBN:
Category : Capital costs
Languages : en
Pages : 80
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Book Description
Author: Bartley Madden
Publisher: Elsevier
ISBN: 0080476422
Category : Business & Economics
Languages : en
Pages : 385
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Book Description
What generates shareholder value? How can it be evaluated? How can it influence investment decisions and corporate strategy? Cash Flow Return On Investment answers all these questions by detailing the pioneering financial research carried out by HOLT Value Associates, the leading consultancy in the field. Read this book if you want to find out what really drives the wealth generation in any business, allowing you to pick which equities will succeed and which strategic initiatives are destined for high returns. The CFROI model is an essential tool for professionals working in finance and corporate strategy. It clarifies how economic value is created in a firm and acts as a reliable guide to: * making investment decisions * taking key strategic decisions * understanding economic value Shows how to judge and compare individual equities across markets and company sectors Cutting edge theory and practice The leading book about shareholder value authored by one of the world's leading consultancies in the field
Author: Michalis Makrominas
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Author: Jennifer Francis
Publisher: Now Publishers Inc
ISBN: 1601981147
Category : Business & Economics
Languages : en
Pages : 97
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Book Description
This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
