scholarly journals Analysts’ recommendations and the market impact of the valuation methods

2019 ◽  
Vol 8 (4) ◽  
pp. 46-55
Author(s):  
Elisa Cavezzali ◽  
Enrico Maria Cervellati ◽  
Pierpaolo Pattitoni ◽  
Ugo Rigoni
Keyword(s):  
Market Reaction ◽  
Abnormal Returns ◽  
Earnings Forecasts ◽  
Cash Flows ◽  
Market Impact ◽  
Target Price ◽  
Valuation Methods ◽  
Valuation Method ◽  
Study Methodology ◽  
Recommendation Revisions

Despite its importance, the informative value of the analysts’ valuation methods has not been thoroughly examined in the literature. Such an issue is relevant with regard to the concerns on analysts’ objectivity. We test whether investors’ reaction is jointly influenced by recommendations and target revisions and mainly by valuation method used because it summarizes the information considered to be relevant by the analysts. We analyse the market reaction to recommendation revisions with an event study methodology, calculating market-adjusted abnormal returns at the report release date. We run regressions to test the market impact of recommendations and target price revisions, as well as their interaction, and we then focus on testing several models to discern market reaction to distinct valuation methods. We show that market reaction is influenced by the valuation methods used in their reports. The majority of previous studies relying on commercial databases report the market reaction in relation to analysts’ recommendations, target prices or earnings forecasts, often overlooking the content of the reports and the methodology used therein. This is due to an information constraint of commercial databases, normally including only the above-mentioned synthetic variables. A notable exception is Asquith, Mikhail, and Au (2005) who find no relation between the market reaction and the valuation methods used by analysts. Compared to Asquith et al. (2005), our research uses a larger database and finds a different result. We show the market reacts differently to distinct valuation methods, without favouring the theoretically more correct ones based on discounting cash flows. We also find that the market reaction is larger when the analysts support their recommendation with more than one valuation method. Our research shows that the market pays attention to the content of the reports and analysts can be more influential when they use more valuation methodologies to cross-check their estimates.

Price and volume effects around Islamic index revisions: the case of DJIM-GCC

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chiraz Labidi ◽  
Dorra Laribi ◽  
Loredana Ureche-Rangau
Keyword(s):  
Trading Volume ◽  
Islamic Law ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Content Type ◽  
Cumulative Abnormal Returns ◽  
Volume Response ◽  
Study Methodology ◽  
Compliance Certification ◽  
Volume Effects

PurposeThis study explores the price and trading volume effects around the quarterly Dow Jones Islamic Market-GCC index (DJIM-GCC) revisions and investigates whether these reactions are driven by firms' fundamentals or by investors' perception of ethical screening.Design/methodology/approachThe authors adopt an event study methodology to analyze the price and volume effects of Islamic indices redefinitions.FindingsThe results exhibit a positive (negative) price reaction for added (deleted) stocks. The authors also document an asymmetric volume response for index additions and deletions. The multivariate analysis of the cumulative abnormal returns reveals that the documented market reaction around Islamic index revisions is mainly related to the compliance attribution (withdrawal).Originality/valueThe approach allows to separate the market reaction arising from changes in firms' fundamentals from that induced by investors' perception of the attribution or withdrawal of a compliance certification. Moreover, the focus on the GCC region, where countries share the same cultural traits and perceive Islamic law identically excludes any social effect that would influence the market reaction due to cultural differences between countries.

Did Adoption of Forward-Looking Valuation Methods Improve Valuation Accuracy in Shareholder Litigation?

2007 ◽  
Vol 22 (4) ◽  
pp. 573-598 ◽  
Author(s):  
Feng Chen ◽  
Kenton K. Yee ◽  
Yong Keun Yoo
Keyword(s):  
Supreme Court ◽  
Cash Flow ◽  
Earnings Forecasts ◽  
Block Method ◽  
Valuation Methods ◽  
Valuation Method ◽  
Shareholder Litigation ◽  
The Law ◽  
Case Basis ◽  
Forward Looking

Before 1984, Delaware judges relied exclusively on the Delaware Block method—an appraisal formula based on trailing earnings and liquidation value—to price shares in shareholder litigation. In 1984, the Delaware Supreme Court changed the law to permit its judges to use any valuation method they deem appropriate. As a result, judges and litigants began switching from the Block method and adopting forward-looking valuation techniques based on cash flow and earnings forecasts. While the use of forward-looking methods potentially improves valuation accuracy by incorporating forecast information, the use of forecasts allows more room for subjective manipulation. Did the adoption of forward-looking methods improve or reduce valuation accuracy in shareholder litigation? We address this question using a comprehensive hand-collected sample of all Delaware corporate “appraisal-remedy” cases published between 1966 and 2002 in Lexis-Nexis. The sample identifies, on a case-by-case basis, the plaintiff's, the defendant's, and the judge's valuation methods and resulting valuation estimates. We show that the adoption of forward-looking valuation methods improves litigants' valuation accuracy on average.

R&D economic efficiency valuation methods and specifics of their application

2020 ◽  
Vol 10 (6) ◽  
pp. 620-635
Author(s):  
Pavel Y. Serikov ◽  
◽  
Konstantin A. Sivolotsky ◽  
Аndrey А. Balakirev ◽  
◽  
...  
Keyword(s):  
Economic Efficiency ◽  
Cash Flows ◽  
Assessment Method ◽  
Alternative Methods ◽  
Scientific Development ◽  
Practical Result ◽  
Valuation Methods ◽  
Advantages And Disadvantages ◽  
Valuation Method ◽  
Increased Risk

Valuation of research and development projects (R&D) is crucial for technological development, financial and operational performance improvement of companies. However, R&D valuation methods are not fully and in detail disclosed in publications, a single concept for assessing the effectiveness of R&D has not yet been developed. The cause of this scientific and practical problem is that scientific developments are carried out in conditions of increased risk and uncertainty, often aimed at solving strategic, long-term tasks, which does not allow at the initial stage to reliably evaluate their final effect of innovations. The object of research in the article are methods for assessing the economic efficiency of R&D. The aim of the article is to formulate an approach to R&D valuation method selection based on applicability criteria developed by the authors. In the course of the study, a review of existing methods for assessing effectiveness was conducted, their advantages and disadvantages were identified, and the feasibility of using a specific assessment method based on the specifics of scientific development was analyzed. There were considered R&D economic efficiency valuation models (discounted cash flows, Monte-Carlo simulations, real option valuation, decision tree analysis, relief from royalty method) as well as methods for determining discount rates used in these methods. When applying various valuation methods, the discount rate may vary due to differences in risk accounting approaches. There were also considered examples of alternative methods for R&D efficiency valuation such as grading system and integral efficiency index. The theoretical result is a review of R&D valuation methods and generalization of the information. The practical result of the work is the description of approach for selection of optimal R&D economic efficiency valuation method and possible implementation of the described approach in practice.

In government we trust: rise and fall of Canadian business income trust conversions

2009 ◽  
Vol 35 (9) ◽  
pp. 784-802 ◽  
Author(s):  
Lawrence Kryzanowski ◽  
Ying Lu
Keyword(s):  
Firm Value ◽  
Abnormal Returns ◽  
Cash Flows ◽  
Market Impact ◽  
Cross Sectional ◽  
Content Type ◽  
Trust Level ◽  
Business Income ◽  
The Government ◽  
Income Trusts

PurposeThe purpose of this paper is to assess the market impact of announcements that publicly traded limited liability firms would convert to business income trusts, and to test the robustness of the tax motive as the primary determinant of any conversion announcement effects by estimating the market impact of the announcement by the Canadian Federal Government that the corporate income of Canadian income trusts would be taxed at the trust level.Design/methodology/approachEvent‐study methodology (including various tests of robustness) is used to examine the market impacts of the initial conversion announcement and the announcement that the corporate income of Canadian income trusts would be taxed at the trust level. Cross‐sectional regressions are used to identify the determinants of the market effect associated with income trust conversion announcements.FindingsThe paper finds that the market‐ and risk‐adjusted abnormal returns (ARs) are positive and very significant on the announcement dates and not significant on the conversion effective dates. The price discovery process is not as smooth for the Canadian government's announcement after the market close on Halloween day 2006, that it would tax income trusts at the trust level. While the ARs are negative and very significant on the first and second trading days after the announcement, much of the second day ARs are reversed in the subsequent two days. Furthermore, negative and significant ARs precede the government announcement. The market impact of trust conversion announcements is primarily related to the tax savings associated with such conversions and more weakly related to potential agency problems associated with free cash flows.Research limitations/implicationsThe research indicates the importance of any taxation changes associated with changes in organization form on firm value. It also identifies the potential for informational leakage associated with government decisions.Originality/valueThe paper highlights the importance of taxes and tax changes and organization form changes on firm valuation.

Properties of analysts’ consensus cash flow forecasts for Australian firms

2020 ◽  
Vol 33 (1) ◽  
pp. 128-147
Author(s):  
Kamran Ahmed ◽  
Muhammad Nurul Houqe ◽  
John Hillier ◽  
Steven Crockett
Keyword(s):  
Cash Flow ◽  
Market Reaction ◽  
Forecast Error ◽  
Earnings Forecasts ◽  
Predictive Performance ◽  
Cash Flows ◽  
Content Type ◽  
Equity Pricing ◽  
Functional Efficiency ◽  
Cash Flow Forecasts

Purpose The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive activity, within the wider processes of financial disclosure in Australia. Design/methodology/approach Two categories of criteria are adopted: first, basic predictive statistical performance relative to a benchmark model and earnings forecasts; and second, relevance for equity pricing, as indicated by the market reaction to cash flow or forecast error reactions. The final sample comprised 2,138 observations between 2001 and 2016 and several regression models are estimated to determine the relative performance and market reaction. Findings Analysts’ consensus cash flow forecasts demonstrate poor predictive performance relative to earnings forecasts. Cash flow forecasts are typically naïve extensions of earnings forecasts. Furthermore, cash flow forecasts appear to be of minimal use for equity market participants in complementing earnings forecasts’ role in informing firms’ equity pricing. Practical implications While analysts’ earnings forecasts are useful for making predictions, the role of analysts’ cash flow forecasts in capital market functional efficiency appears quite limited. Originality/value This study is one of few that examines comparative usefulness of analysts’ earnings and cash flow forecasts and their predictive power using the Australian setting. Additionally, it enriches the sparse international literature on such forecasts.

Excess offer premium and acquirers’ performance

2018 ◽  
Vol 35 (3) ◽  
pp. 407-425
Author(s):  
Won-Seok Woo ◽  
Suhyun Cho ◽  
Kyung-Hee Park ◽  
Jinho Byun
Keyword(s):  
Market Reaction ◽  
Abnormal Returns ◽  
Market Returns ◽  
Content Type ◽  
Acquiring Firms ◽  
Study Methodology ◽  
Long Term Performance ◽  
Term Performance ◽  
The Impact

PurposeThis paper aims to investigate the causes of mergers and acquisitions (M&A) deals that acquiring firms pay excess premium beyond the market-expected level and examine the relation between the announcement return and long-term performance of the acquiring firms.Design/methodology/approachBased on a sample of 1,767 US firms’ M&A deals from 2000 to 2014, the authors use the expectation model used by Ang and Ismail (2015) to measure normal offer premium in an M&A deal. They conduct the standard event study methodology to observe the market reaction for acquiring companies on the announcement day. Buy-and-hold abnormal returns are used for the main explanatory variable so as to find the impact of the premium paid on the long-term performance of the acquirer.FindingsFirst, acquiring firms are faced with negative market returns when acquiring firms pay excess premiums. Second, poor long-term performance of the acquiring firms is observed if acquiring firms pay excess premium. Finally, the negative relation between excess premium and acquiring firms’ long-term performance weakens, as the sample period becomes longer.Research limitations/implicationsThe hypotheses and results of the empirical study are as follows. First, the acquirer’s market reaction on the announcement day is negative when it pays an excess offer premium. This is because the market perceives the premium to be greater than the value of the deal, which damages the value of the market, as it is not perceived as a proxy for future synergy. Second, the acquirer’s long-term performance is low when it pays the excess offer premium. It is the same result as the acquirer’s market reaction on the announcement day. This shows that the excess premium does not result in either a short-term positive reaction or a long-term profit for the acquiring shareholders. However, it is found that the relationship between the excess premium and the long-term performance of the acquirer decreases with time. This is because the long-term performance of the acquirer is more affected by management and other events after the deal.Originality/valueThe authors divide the total premium paid into the normal offer premium and the excess premium, and their focus is on the excess premium part. The main contribution of this paper is that it analyzes how the excess premium affects the market reaction on the announcement day and the long-term performance of acquiring firms.

scholarly journals A Perspective on Industry Classification and Market Reaction to Corporate News: Evidence from India

2018 ◽  
Vol 65 (1) ◽  
pp. 31-50 ◽  
Author(s):  
Nayanjyoti Bhattacharjee ◽  
Anupam De
Keyword(s):  
Stock Market ◽  
Market Reaction ◽  
Stock Exchange ◽  
Critical Factor ◽  
Earnings Forecasts ◽  
Relative Importance ◽  
Study Methodology ◽  
Indian Stock Market ◽  
Regulatory Management ◽  
Event Study Methodology

Abstract In this paper, we provide a cross-industry perspective on the market reaction to different corporate news in the context of Indian stock market. We have studied the price and volume movements associated with eight broadly defined news categories namely Analyst Calls, Earnings, Earnings Forecasts, Finance, Legal and Regulatory, Management, Operations and Restructuring. We have employed the standard event study methodology on a sample of stocks listed on the National Stock Exchange of India for the purpose of our study. We observe that the market reaction to firm specific corporate news varies according to the type of news across different industry groups. We also observe that the sentiment of the news is a critical factor which influences the market reaction to such news flow across industry groups. We also provide a cross-industry perspective on the relative importance of different corporate news categories after taking into account the sentiment of the news in the context of Indian stock market.

scholarly journals Impairment of Assets and Market Reaction during COVID-19 Pandemic on the Example of WSE

Risks ◽  
2021 ◽  
Vol 9 (10) ◽  
pp. 183
Author(s):  
Bartłomiej Lisicki
Keyword(s):  
Market Reaction ◽  
Stock Exchange ◽  
Abnormal Returns ◽  
Economic Downturn ◽  
Main Task ◽  
Main Hypothesis ◽  
Warsaw Stock Exchange ◽  
Study Methodology ◽  
Crisis Conditions ◽  
The Impact

The main task of the article is to examine the impact of the reported impairment of assets (IoA) on the market reaction of investors on the Warsaw Stock Exchange [WSE] in the crisis condition caused by the COVID-19 pandemic. There is a need to verify whether the disclosure of this information in the period of economic downturn will cause a similar negative reaction as in previous topics in this area. Research undertaken in this article helps identify the rules of behaviour (in the short term) whether the reaction of investors on updating the company’s assets in crisis conditions is different than in times of prosperity. The main hypothesis will be verified using the event study methodology. It allows to verify whether the upcoming information about IoA during the COVID-19 pandemic confirms an existence of statistically significant negative abnormal returns. Based on the 55 cases of current reports informing about IoA, which were submitted to the investors in the year 2020 and finally qualified for the research sample, I have not observed statistically significant negative abnormal returns on the adjacent days. The results are different from those obtained by researchers who study the market reaction to the IoA under non-crisis conditions of the economy.

Market reaction of the business cooperation with IT service provider: an investigation of IBM

2020 ◽  
Vol 46 (12) ◽  
pp. 1549-1567
Author(s):  
Cheng-Kui Huang ◽  
Kwo-Whei Lee ◽  
Chien-Huei Chou
Keyword(s):  
Information Technologies ◽  
Market Reaction ◽  
News Coverage ◽  
Abnormal Returns ◽  
Positive Influence ◽  
Content Type ◽  
It Service ◽  
Different Types ◽  
Study Methodology ◽  
Event Study Methodology

PurposeSince business competition has become more intense throughout the world, most enterprises are seeking to engage in business cooperation with other partners in order to enhance their competitive strengths. However, they do not necessarily develop mature information technologies’ (ITs) capabilities and skills internally but rather outsource them to IT providers. Therefore, the benefits received by firms which adopt the approach of business cooperation with IT providers have become an interesting issue for managers and shareholders.Design/methodology/approachThis study adopted an event study methodology for apprising the short-term business value from the stock market. The authors predicted that investors will react as they receive news coverage about the strategy of business cooperation between outsourcing firms and an IT provider, International Business Machines (IBM) Corporation. The authors then collected all news coverage regarding the firms which had announced business cooperation with IBM and observed different types of abnormal returns.FindingsOn analyzing 53 announcements of cooperation with IBM from 2008 to 2016, the authors found that the announcement of business cooperation had a significantly positive influence on companies' market value.Originality/valueTo the best of the authors’ knowledge, this is the first study to investigate the issue for market reaction to the announcement of business cooperation with IBM.

scholarly journals Market Reaction to Buyback Announcement: Evidences from Select Indian Manufacturing Companies

2019 ◽  
Vol 8 (4) ◽  
pp. 9342-9353
Keyword(s):  
Market Reaction ◽  
Abnormal Returns ◽  
Market Model ◽  
Open Market ◽  
Manufacturing Companies ◽  
Tender Offer ◽  
Market Return ◽  
Study Methodology ◽  
Year 2000 ◽  
Event Study Methodology

Buyback of shares is the company’s strategic move to decrease the outstanding shares in the market by buying its own shares from their own shareholders. This study is an effort to analyse the effect of share buyback announcement by manufacturing companies in India, considering 182 events from both the tender offer and open market method from financial year 2000-01 to 2018-19. The event study methodology from the market model has been considered to attain the Abnormal returns (AR). Stock return and market return both are calculated from the daily market data of BSE. BSE S&P SENSEX is considered as benchmark index for the calculation of market return. The market reaction to buyback offers are positive in India according to most of the previous studies, the same is observed even in this study on select manufacturing companies.

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