A Fundamental Analysis Approach to Oil and Gas Firm Valuation

Most fundamental analysis studies have focused on fundamentals selected by a data-driven approach on large samples of firms from numerous industries. This paper reports the results of a fundamental analysis of a single industry, the US oil and gas exploration and production industry, using variables identified by industry financial analysts. The results demonstrate a significant relationship between a number of the fundamentals with both the market value of equity and cumulative stock return. The results also suggest that the fundamentals provide incremental information beyond earnings, change in earnings, and book value of equity when explaining equity values and stock returns.     

Analysts Earnings Forecasts and the Roles of Earnings and Book Value in Equity Valuation

This study examines the effect of the degree of association between current earnings and expected future earnings on the relative importance of earnings and book value for explaining equity price. Consensus analysts forecasts of one-year-ahead earnings are used to proxy for expected future earnings and are compared to reported current earnings to measure the degree of the association. We find that the value-relevance of current earnings negatively correlates with the extent to which consensus analysts forecasts deviate from current earnings. We also find that the incremental explanatory power of book value for equity price positively correlates with this measure. These results remain robust after controlling for factors known to be affecting the value-relevance of earnings such as negative earnings and the earnings-to-book ratio. Our results also show that this analysts' forecast-based measure of `earnings persistence' dominates historical earnings variance in explaining cross-sectional variations in the value-relevance of earnings and book value.     

投资者保护、大股东持股比例与现金持有量

以2005～2011年沪深两市A股391家上市公司为样本研究投资者保护、大股东持股比例和现金持有量的关系,研究结果表明,大股东持股比例与现金持有量间呈倒"U"型关系。进一步按照投资者保护程度的高低对样本进行分组,研究发现,当大股东持股比例小于48%时,投资者保护程度高的组,大股东持股比例和现金持有量呈显著正相关关系;当大股东持股比例大于48%时,投资者保护程度高的组,大股东持股比例和现金持有量呈显著负相关关系。     

Equity valuation: A survey of professional practice

This paper reports the results of a scientific survey of the equity valuation practices of CFA Institute members with equity analysis job responsibilities. Using an instrument designed to minimize biases in prior valuation surveys and sampling a larger group than in previous studies (13,500 investment professionals, resulting in 1,980 valid completed questionnaires), this paper documents professional practices in the selection of equity valuation approaches, including specific model variations and key input preferences. Important differences in practice were observed across geographies and employer firm types.     

The Distributional Properties of the Debt to Equity Ratio: Some Implications for Empirical Research

The purpose here is to assess empirically the quasi-supply side model of the firm developed in the paper by Ashton et al. (2004 ) by testing the prediction of the model that the evolution of a firm's debt to equity ratio will be compatible with a non-linear (target adjustment) process whose underlying probability density function possesses no convergent moments. Using a thirty-two-year history of the debt to equity ratio for each of ninety 'mature' United Kingdom firms, a non-parametric estimation procedure shows that the debt to equity ratio evolves in terms of a process which is largely consistent with the predictions of this model. In particular, the evolution of the debt to equity ratio is compatible with a 'long (fat) tailed' density function with no convergent moments. This has the important implication, supported by our empirical analysis, that the linear dynamic models which characterize empirical work in this area will be mis-specified and will return inconsistent and temporally unstable estimates of the target adjustment process as a consequence.     

The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns

A number of financial variables have been shown to be effective in explaining the time-series of aggregate equity returns in both the UK and the US. These include, inter alia , the equity dividend yield, the spread between the yields on long and short government bonds, and the lagged equity return. Recently, however, the ratio between the long government bond yield and the equity dividend yield – the gilt-equity yield ratio – has emerged as a variable that has considerable explanatory power for UK equity returns. This paper compares the predictive ability of the gilt-equity yield ratio with these other variables for UK and US equity returns, providing evidence on both in-sample and out-of-sample performance. For UK monthly returns, it is shown that while the dividend yield has substantial in-sample explanatory power, this is not matched by out-of sample forecast accuracy. The gilt-equity yield ratio, in contrast, performs well both in-sample and out-of-sample. Although the predictability of US monthly equity returns is much lower than for the UK, a similar result emerges, with the gilt-equity yield ratio dominating the other variables in terms of both in-sample explanatory power and out-of-sample forecast performance. The gilt-equity yield ratio is also shown to have substantial predictive ability for long horizon returns.     

The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns

A number of financial variables have been shown to be effective in explaining the time-series of aggregate equity returns in both the UK and the US. These include, inter alia , the equity dividend yield, the spread between the yields on long and short government bonds, and the lagged equity return. Recently, however, the ratio between the long government bond yield and the equity dividend yield – the gilt-equity yield ratio – has emerged as a variable that has considerable explanatory power for UK equity returns. This paper compares the predictive ability of the gilt-equity yield ratio with these other variables for UK and US equity returns, providing evidence on both in-sample and out-of-sample performance. For UK monthly returns, it is shown that while the dividend yield has substantial in-sample explanatory power, this is not matched by out-of sample forecast accuracy. The gilt-equity yield ratio, in contrast, performs well both in-sample and out-of-sample. Although the predictability of US monthly equity returns is much lower than for the UK, a similar result emerges, with the gilt-equity yield ratio dominating the other variables in terms of both in-sample explanatory power and out-of-sample forecast performance. The gilt-equity yield ratio is also shown to have substantial predictive ability for long horizon returns.     

A Bayesian framework for combining valuation estimates

Discounted cash flow, method of comparables, and fundamental analysis typically yield discrepant valuation estimates. Moreover, the valuation estimates typically disagree with market price. Can one form a superior valuation estimate by averaging over the individual estimates, including market price? This article suggests a Bayesian framework for combining two or more estimates into a superior valuation estimate. The framework justifies the common practice of averaging over several estimates to arrive at a final point estimate.     

Valuation Weights,Linear Dynamics and Accounting Conservatism: An Empirical Analysis

Residual income models provide an important theoretical link between equity valuation and financial statement variables. While various researchers have developed models of how accounting policy impacts on the structure of these models, empirical support for these models is at best weak and frequently contradictory. In this paper, we develop an analytical model, which identifies the dependency between valuation weights in residual income models and the associated structure of earnings information dynamics and accounting conservatism. In contrast to many earlier studies, we find strong evidence of conservatism in our reformulation of the linear dynamics. We proceed to test our predictions of the dependency of the weights on two measures of conservatism, the conventional measure of price‐to‐book ratio and the recent measure of a C‐Score index developed by Khan and Watts (2009) and find that the empirical results accord well with our theoretical predictions in the case of the former but not the latter measure.     

Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors

Abstract:  This paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can drain the assets of the firm and expropriate other creditors by repaying their credit before bankruptcy. The right of the bankruptcy court to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors.     

Venture-backed Private Equity Valuation and Financial Statement Information

The relationship between (a) private and public equity market valuations and (b) financial statement information is examined for a sample of 502 venture capital backed companies from six different industries over the 1993–2003 period. Financial statement information explains a sizable component of the levels of and changes in valuation in both the Pre-IPO and Post-IPO periods. The findings support prior research for Post-IPO companies that revenues are value enhancing and costs are value diminishing. For the Pre-IPO period, we find that cost of sales; sales, marketing, general and administrative; and research and development are value enhancing—even when revenues are included in the analysis. This is consistent with costs incurred by early-stage, venture-backed companies having a strong “investment aspect” as the companies build a platform/infrastructure to grow revenue and validate their business model(s). We document the growth of early stage companies for revenues and costs in both calendar time (by round of private equity financing) and event time (relative to their eventual IPO).

Stock Market Valuation of Deferred Tax Assets: Evidence from Internet Firms

Abstract:   We use the provisions of SFAS No. 109 , Accounting for Income Taxes , to examine the extent to which stock prices of Internet firms were associated with expectations of future profitability before versus after the 'market correction' in early 2000. We find that the valuation of deferred tax assets of firms with business models reliant on the level of web site traffic was significantly greater after the market correction. In our view, this evidence is consistent with pre‐correction mispricing.     

股权制衡对上市公司绩效的非线性影响——基于股权制衡度的新测算

测算股权制衡度时不考虑股东间的关联关系可能引致偏差。鉴此,重新测算了股权制衡度,以2003~2013年927家 A 股主板上市公司为样本研究其与公司绩效的关系。结果表明：“新股权制衡度”与公司绩效为非线性的 U 型关系,而“旧股权制衡度”与公司绩效为线性关系;[1,2]为股权制衡度对公司绩效影响的灰色区间;股权制衡度与公司绩效的关系受股东持股模式和外部环境影响。研究结果支持条件有效论,适度的股权制衡才能发挥积极作用。     

Earnings Components,Accounting Bias and Equity Valuation

In this paper we address three issues in accounting-based equity valuation: (i) How are valuation parameters related to earnings persistence and accounting conservatism when earnings components aggregate, or “add up”, in valuation? (ii) What does aggregation of earnings components in valuation imply for abnormal earnings dynamics? and (iii) When is an earnings component “irrelevant” and “core”?earnings the relevant construct for valuation? Assuming linear valuation, no-arbitrage, dividend irrelevance and clean surplus accounting, we show that when earnings components aggregate, valuation expressions and abnormal earnings dynamics are generalizations of the Ohlson (1995) model, incorporating simple adjustments for accounting conservatism. When “core” earnings are the relevant earnings construct, valuation expressions closely resemble the aggregation case, but core (abnormal) earnings replaces clean surplus (abnormal) earnings. We demonstrate that an earnings component can be irrelevant in valuation even when it is predictable.     

The Use of a Statement of Changes in Financial Position to Interpret Financial Data: An Empirical Investigation

This study provides empirical evidence on the use of a statement of changes in financial position by financial analysts to interpret and make judgments on information contained in annual reports. Analysts were required to answer five questions developed from claims made in a professional accounting standard about the purpose of the statement of changes in financial position. The results indicate that the statement of changes in financial position does not generally enhance financial analysis.     

Survey and Market-based Evidence of Industry-dependence in Analysts' Preferences Between the Dividend Yield and Price-earnings Ratio Valuation Models

Prior research has shown that analysts' preferred valuation models are the price-earnings (PE) ratio and the dividend yield. This paper presents strong evidence that the relative importance of these two models varies according to stock market sector. Companies in the services, industrials and consumer goods sectors are shown to be 'PE-valued' while financials and utilities companies are shown to be 'yield-valued'. These findings are derived from survey research and then tested in a market-based model. This use of independent, mutually reinforcing research methods contributes to the robustness of the findings.     

Structuring financial statement analysis projects to enhance critical thinking skills development

This paper documents a method of structuring financial statement analysis projects to enhance the development of students’ critical thinking skills. The project is structured in a cooperative learning framework in which a student accesses financial statement information from the World Wide Web, performs a financial statement analysis, and then engages in an exercise with other students who have analyzed firms in the same industry. Both the individual and team phases of the project offer opportunities for students to develop several important critical thinking skills.     

Accounting‐Based Probabilistic Prediction of ROE,the Residual Income Valuation Model and the Assessment of Mispricing in the Swedish Stock Market

Using Swedish stock market data, this study investigates whether an investment strategy based on publicly available accounting information can generate abnormal investment returns. The strategy involves two steps. First, an accounting‐based probabilistic prediction model of changes in the medium‐term book return on owners' equity (ROE) is estimated. Second, market expectations of changes in medium‐term ROE are assessed through observed stock prices and the residual income valuation model. Stock market positions over 36‐month holding periods are taken when the accounting‐based predictions of ROE and the market expectations differ. Over the period 1983–2003, the investment strategy generated values of Jensen's alpha corresponding to an average monthly excess return for a hedge position of up to 0.8% for a sample of manufacturing companies. In the main this hedge return was caused by strong positive returns to the long positions, and additional analyses show that the returns appear to have been affected by a positive market sentiment bias (i.e., positive ROE surprises being associated with stronger price reactions than negative ROE surprises) making out‐of‐sample inferences somewhat dubious. Furthermore, most of the investment returns accrued over holding periods up to around 1995, with no indications of market mispricing over the last third (1995–2003) of the investment period. The empirical results are consistent with market investors having become more sophisticated in their use of publicly available accounting information over time.