Evaluating the long-term valuation effect of efficient asset utilization and profit margin on stock returns

2018 ◽  
Vol 26 (1) ◽  
pp. 193-210
Author(s):  
Robert Houmes ◽  
Charlie Chulee Jun ◽  
Kim Capriotti ◽  
Daphne Wang
Keyword(s):  
Stock Returns ◽  
Firm Value ◽  
Relative Effectiveness ◽  
Profit Margin ◽  
Capital Asset Pricing ◽  
Content Type ◽  
Valuation Effect ◽  
Long Run ◽  
Asset Turnover

Purpose This study aims to investigate the relations between long-window stock returns and prior years’ increases in DuPont identity components: profit margin and asset turnover. In particular, the authors examine the relative effectiveness of profit margin and asset turnover to predict years ahead stock returns. Design/methodology/approach To test the assertions, the authors regress raw, Capital Asset Pricing Model and Fama-French returns on controls and variables of interest, profit margin and asset turnover, lagged years t − 1, t − 2 and t − 3. To control for factors that could affect returns over the long windows, they also include returns lagged over years t − 1, t − 2 and t − 3 to coincide with the lagged profit margin and asset turnover variables of interest. Findings Results show a negative (positive) relation between returns and increases in lagged profit margin (asset turnover). However, the negative returns-profit margin relation is mitigated when increases in profit margin and asset turnover occur in the same lagged year. Originality/value This study adds to the existing body of research on the DuPont identity by temporally evaluating the relative long-run contributions of profit margin and asset turnover to firm value.

Long-term prior return patterns in stock and sector returns in India

2014 ◽  
Vol 11 (2) ◽  
pp. 192-210
Author(s):  
Sanjay Sehgal ◽  
Sakshi Jain
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Risk Model ◽  
Factor Model ◽  
Size Factor ◽  
Content Type ◽  
Long Run ◽  
Portfolio Managers ◽  
Sector Returns

Purpose – The purpose of this paper is to analyze long-term prior return patterns in stock returns for India. Design/methodology/approach – The methodology involves portfolio generation based on company characteristics and long-term prior return (24-60 months). The characteristic sorted portfolios are then regressed on risk factors using one factor (capital asset pricing model (CAPM)) and multi-factor model (Fama-French (FF) model and four factor model involving three FF factors and an additional sectoral momentum factor). Findings – After controlling for short-term momentum (up to 12 months) as documented by Sehgal and Jain (2011), the authors observe that weak reversals emerge for the sample stocks. The risk model CAPM fails to account for these long-run prior return patterns. FF three-factor model is able to explain long-term prior return patterns in stock returns with the exception of 36-12-12 strategy. The value factor plays an important role while the size factor does not explain cross-section of average returns. Momentum patterns exist in long-term sector returns, which are stronger for long-term portfolio formation periods. Further, the authors construct sector factor and observe that prior returns patterns in stock returns are partially absorbed by this factor. Research limitations/implications – The findings are relevant for investment analysts and portfolio managers who are continuously tracking global markets, including India, in pursuit of extra normal returns. Originality/value – The study contributes to the asset pricing and behavioral literature from emerging markets.

The value relevance of capital expenditures and the business cycle

2018 ◽  
Vol 35 (3) ◽  
pp. 386-406 ◽  
Author(s):  
Sungsoo Kim ◽  
Brandon byunghwan Lee
Keyword(s):  
Business Cycles ◽  
Stock Returns ◽  
Value Relevance ◽  
Financial Data ◽  
Capital Expenditures ◽  
Capital Investments ◽  
Content Type ◽  
Market Participants ◽  
Business Conditions

Purpose This paper aims to clarify the relationship between corporate capital investments and business cycles. Specifically, a major purpose of this paper is to investigate whether there are inherent differences in corporate investment patterns and whether the stock market exhibits different reactions to the value relevance of capital expenditures across different business conditions. Design/methodology/approach The authors use pooled ordinary least square regressions with archival stock price data and financial data from CRSP and Compustat. The authors regress buy and hold returns on the main test variables and control variables that are identified to be related to the investment literature. Findings This paper provides empirical evidence that US firms’ capital expenditures are more value relevant to capital market participants during expansionary business cycles and, conversely, less value relevant during contractionary business cycles. This evidence validates previous literature that has found the information content of capital expenditures to be uncertain and cyclical in nature. Research limitations/implications The main limitation of this paper, as with other work dealing with stock returns and archived financial data, is that the authors try to match stock returns with contemporaneous financial data in an association study context. The precise mapping in this methodology is always challenging and has been questioned in the literature. Practical implications This paper has various implications for capital market participants. Capital expenditures are good news for investors, but they will make a better investment when firms make capital investments during an expansionary period. Creditors deciding whether to extend credit to firms would benefit from more accurate information on the viability of long-term investment. The results also suggest to creditors that an excessive number of loans during the contractionary period may be suboptimal because firms’ returns on capital investment are smaller in that period than in the expansionary period. Social implications Given the valuation of implications of long-term capital investments across different business conditions, this paper sheds light on asset allocations for mutual funds, institutional investors who are entrusted with investors’ investments including retirement funds. Originality/value This paper fulfils an identified need to study how capital investments are valued differently across different business conditions.

Long run apartment price dynamics in Swedish and German cities

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sviatlana Engerstam
Keyword(s):  
Banking Sector ◽  
Cointegration Analysis ◽  
Price Dynamics ◽  
Long Term Effects ◽  
Content Type ◽  
Macroeconomic Variables ◽  
Price Elasticities ◽  
Long Run ◽  
German Cities

PurposeThis study examines the long term effects of macroeconomic fundamentals on apartment price dynamics in major metropolitan areas in Sweden and Germany.Design/methodology/approachThe main approach is panel cointegration analysis that allows to overcome certain data restrictions such as spatial heterogeneity, cross-sectional dependence, and non-stationary, but cointegrated data. The Swedish dataset includes three cities over a period of 23 years, while the German dataset includes seven cities for 29 years. Analysis of apartment price dynamics include population, disposable income, mortgage interest rate, and apartment stock as underlying macroeconomic variables in the model.FindingsThe empirical results indicate that apartment prices react more strongly on changes in fundamental factors in major Swedish cities than in German ones despite quite similar development of these macroeconomic variables in the long run in both countries. On one hand, overreactions in apartment price dynamics might be considered as the evidence of the price bubble building in Sweden. On the other hand, these two countries differ in institutional arrangements of the housing markets, and these differences might contribute to the size of apartment price elasticities from changes in fundamentals. These arrangements include various banking sector policies, such as mortgage financing and valuation approaches, as well as different government regulations of the housing market as, for example, rent control.Originality/valueIn distinction to the previous studies carried out on Swedish and German data for single-family houses, this study focuses on the apartment segment of the market and examines apartment price elasticities from a long term perspective. In addition, the results from this study highlight the differences between the two countries at the city level in an integrated long run equilibrium framework.

A multifractal detrended fluctuation analysis of housing market: a role of financial crises in developed economies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Ali Raza ◽  
Nida Shah ◽  
Muhammad Tahir Suleman ◽  
Md Al Mamun
Keyword(s):  
Financial Crisis ◽  
Housing Market ◽  
Market Efficiency ◽  
House Price ◽  
Fluctuation Analysis ◽  
Content Type ◽  
Multifractal Detrended Fluctuation Analysis ◽  
Long Run ◽  
Before And After

Purpose This study aims to examine the house price fluctuations in G7 countries by using the multifractal detrended fluctuation analysis (MF-DFA) for the years 1970–2019. The study examined the market efficiency between the short-term and long-term in the full sample period, before and after the global financial crisis period. Design/methodology/approach This study uses the MF-DFA to analyze house price fluctuations. Findings The findings confirmed that the housing market series are multifractal. Furthermore, all the markets showed long-term persistence in both the short and long-term. The USA is identified as the most persistent house market in the short run and Japan in the long run. Moreover, in terms of efficiency, Canada is identified as the most efficient house market in the long run and the UK in the short run. Finally, the result of before and after the financial crisis period is consistent with the full sample result. Originality/value The contribution of this study in the literature is fourfold. This is the first study that has examined the house prices efficiency by using the MF-DFA technique given by Kantelhardt et al. (2002). Previously, the house market prices and efficiency has been investigated using generalized Hurst exponent (Liu et al., 2019), Quantile Regression Approach (Chae and Bera, 2019; Tiwari et al., 2019) but no study to the best of the knowledge has been done that has used the MF-DFA technique on the housing market. Second, this is the first study that has focused on the house markets of G7 countries. Third, this study explores the house market efficiency by dividing the market into two periods i.e. before and after the financial crisis. The study strives to investigate if the financial crisis determines the change in the degree of market efficiency or not. Finally, the study gives valuable insights to the investors that will help them in their investment decisions.

Tornadoes, poverty and race in the USA: A five-decade analysis

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Russ D. Kashian ◽  
Tracy Buchman ◽  
Robert Drago
Keyword(s):  
African American ◽  
African Americans ◽  
Study Finding ◽  
Median Income ◽  
Content Type ◽  
Vulnerable Communities ◽  
Long Run ◽  
Level Data ◽  
The Usa

PurposeThe study aims to analyze the roles of poverty and African American status in terms of vulnerability to tornado damages and barriers to recovery afterward.Design/methodology/approachUsing five decades of county-level data on tornadoes, the authors test whether economic damages from tornadoes are correlated with vulnerability (proxied by poverty and African American status) and wealth (proxied by median income and educational attainment), controlling for tornado risk. A multinomial logistic difference-in-difference (DID) estimator is used to analyze long-run effects of tornadoes in terms of displacement (reduced proportions of the poor and African Americans), abandonment (increased proportions of those groups) and neither or both.FindingsControlling for tornado risk, poverty and African American status are linked to greater tornado damages, as is wealth. Absent tornadoes, displacement and abandonment are both more likely to occur in urban settings and communities with high levels of vulnerability, while abandonment is more likely to occur in wealthy communities, consistent with on-going forces of segregation. Tornado damages significantly increase abandonment in vulnerable communities, thereby increasing the prevalence of poor African Americans in those communities. Therefore, the authors conclude that tornadoes contribute to on-going processes generating inequality by poverty/race.Originality/valueThe current paper is the first study connecting tornado damages to race and poverty. It is also the first study finding that tornadoes contribute to long-term processes of segregation and inequality.

scholarly journals Do consistent CSR activities matter for firm value?

2016 ◽  
Vol 14 (1) ◽  
pp. 340-350 ◽  
Author(s):  
Loai Alsaid
Keyword(s):  
Stock Returns ◽  
Firm Value ◽  
Value Relevance ◽  
Explanatory Variables ◽  
Earnings Response Coefficient ◽  
Unexpected Earnings ◽  
Valuation Effect ◽  
Interaction Variables ◽  
Earnings Response ◽  
Corporate Social

This paper investigates how investments in corporate social responsibility (CSR) activities affect firm value. We categorise firms’ CSR activities as strategic or opportunistic based on consistency, and analyse the differential value relevance effect. We use the Egyptian Economic Justice Index (EEJI) as the most representative measure for firms’ CSR activities in Egypt. To measure valuation effect, we adopt an earnings response coefficient (ERC) model. Our main explanatory variables are interaction variables with unexpected earnings and two dummy variables; one indicating CSR activities, and one indicating their consistency. We document these variables as positively and negatively significant. Our findings show that investing in CSR activities consistently and strategically may increase firm’s profitability and firm value. However, firms that sporadically invest in CSR activities show a smaller relationship between unexpected earnings and stock returns than firms that consistently invest in CSR activities.

Groupon: let's make a deal?

2015 ◽  
Vol 11 (1) ◽  
pp. 26-38
Author(s):  
Susan White
Keyword(s):  
Social Media ◽  
Initial Public Offering ◽  
Content Type ◽  
Media Companies ◽  
Secondary Sources ◽  
Long Run ◽  
Public Offering ◽  
Media Firms ◽  
Term Performance

Synopsis Groupon, an online coupon company, was one of many companies that considered an initial public offering (IPO) during what might be a second technology/internet/social media IPO boom in 2011. Some companies chose to postpone their IPOs, while others took advantage of the media attention focussed on technology companies, and in particular, social media firms. Should investors hop on the tech IPO bandwagon, or hold off to better evaluate the long-term prospects of tech companies, and in particular social media companies? Would the valuation of Groupon justify an investment in IPO shares? Research methodology The case was researched from secondary sources, using Groupon's IPO filing information, news articles about the IPO and industry research sources, such as IBIS World. Relevant courses and levels This case is appropriate for an advanced undergraduate or MBA corporate finance or investment elective. Most introductory finance classes do not have the time to cover later chapters in a finance textbook, where information about IPOs is generally found. It could also be used at the end of a core finance course, where the instructor wanted to introduce this topic through a case study of a hard-to-value internet-based company to illustrate the difficulties in setting IPO prices. The case could also be used in an equity analysis class, an entrepreneurial finance class or an investment class, to spur discussion about valuing an internet company and choosing appropriate investments for pension fund investing. This case could also be used in a strategy class, focussing on the five forces question, and eliminating the valuation question. Theoretical basis There is a great deal of literature about IPOs and their long-term performance. An excellent source is Jay R. Ritter's research, http://bear.warrington.ufl.edu/ritter, which has a longer time period and more data than could be contained in this case. IPO puzzles include persistent undervaluing of IPOs; in other words, the offer price is lower than, and sometimes substantially lower than, the first day close price. A second issue is the generally poorer long-run performance of companies after their IPO when compared to similar firms that did not do an IPO.

Liquidity hedging with futures and forward contracts

2019 ◽  
Vol 36 (2) ◽  
pp. 265-290 ◽  
Author(s):  
Yong Jae Shin ◽  
Unyong Pyo
Keyword(s):  
Firm Value ◽  
Minimal Amount ◽  
Forward Contracts ◽  
Content Type ◽  
Term Operation ◽  
Futures Contract ◽  
Hedging Strategies ◽  
Parameter Values ◽  
Risky Debt

Purpose This paper aims to develop hedging strategies using both futures and forward contracts and issuing risky debt when financially constrained firms are forced to operate in long horizon. Design/methodology/approach The authors present a model for developing hedging strategies using both futures and forward contracts and issuing risky debt. A theoretical model employing stochastic differential equations for forward hedging is illustrated with a numerical example over parameter values consistent with the literature. Findings A financially constrained firm with limited cash balance must hedge its liquidity with both future and forward contracts and issue risky debt to support its long-term operations. The firm can issue a minimal amount of risky debt by adding forward contracts into hedging and can increase its value higher than that when hedging with only futures contracts. We show numerically that hedging with both futures and forward contracts allows the firm to issue minimal risky debt in increasing its firm value. Practical implications When Metallgesellschaft nearly collapsed in 1993, it offered long-term forward contracts to its customers and attempted to hedge its risk by rolling over series of short-term futures contract. It created the situation of inherent mismatch in maturity structure. A financially constrained firm operating in a long horizon appears to commit its liquidity as long-term forward contracts, which cannot be fully hedged with series of futures contacts. The firm should hedge its liquidity with both futures and forward contracts and avoid liquidation with deadweight costs in its long-term operation. Originality/value This is the first study examining hedging strategies with both futures and forward contracts.

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