Valuation Accuracy and Infinity Horizon Forecast: Empirical Evidence from Europe

This paper focuses on the assumptions of infinite-horizon forecasting in the field of firm valuation. The estimate of long-run continuing values is based on the hypothesis that companies should have reached the steady state at the end of the period of explicit forecasts. It is argued that the equivalence between cash accounting and accrual accounting is the way of verifying the steady-state assumption, defined as the state when a firm earns exactly its cost of capital, i.e., what we would expect in pure-competition settings. From this definition, we derive that the "ideal" growth rate to use in steady state is equal to the reinvestment rate times Weighted Average Cost of Capital. To validate our approach, we collect a sample of 784 analyst valuations and compare how the implied target prices deviate from what the target prices would have been using the "ideal" steady-state growth rates. Using Logit and Cox regression models, we find that this deviation has predictive value over the probability that actual market price reaches the target price over the following 12-month period—the smaller the deviation the greater is the likelihood that the market price reaches the target price.     

Equity Valuation and Current Cost Disclosures: the Case of Mexico

This study uses an accounting-based valuation model to investigate the relation between the market value of publicly traded Mexican firms and their disclosures of price-level adjusted accounting information. The model is estimated on a sample of Mexican companies during 1987–1990, when annual inflation rates in Mexico decreased from 130 per cent to 20 per cent. The results indicate that general price level-adjusted and current cost disclosures explain a significant portion of the cross-sectional variation in the market-to-book ratios of the sample firms. Further, the explanatory power of holding gains is robust to decreases in the general level of inflation, which suggests that current cost and constant peso disclosures are relevant for determining firm value over a wide range of inflation rates. These results are particularly important now since the Mexican Institute of CPAs has proposed eliminating the measurement of holding gains in order to make Mexican financial statements more comparable to US and Canadian GAAP.     

Institutional Ownership, Strategic Choices and Corporate Efficiency: Evidence from Japan

Based on the tenets of capital allocation systems theory, stewardship theory, and 'going concern' concept of business, institutional ownership is proposed to affect corporate productivity, both directly and indirectly, in large Japanese corporations through a set of four firm-level choices: product/market development, R&D intensity, capital intensity, and leverage. Using data on 118 corporations drawn from five industry sectors in Japan, and applying a partial mediation technique, this study tests an integrated, causal model of the relationships among these variables. Results show mixed support for the model. No direct relationship between institutional ownership and productivity is observed. However, institutional ownership affects productivity indirectly through R&D intensity and leverage. Although product/market development and capital intensity also affect productivity, institutional ownership has no significant relationship with them.     

Vertical Integration,Organizational Governance,and Firm Performance: Evidence from Italian Business Groups

Assuming transaction cost economics as a normative tool, we investigate the relationship between firms' ‘observed’ vertical integration choices and their economic performance. We use a two‐stage methodology: in the first, a measure of governance misalignment is computed as a difference between the governance form (i.e., ownership or outsourcing) predicted by transaction cost economics and the form actually observed; the second stage consists of estimating a performance equation where the misalignment variable is introduced together with a set of independent variables. Compared with previous studies, we introduce two novelties: we use the business group as the unit of analysis to detect the ownership of vertically related productions; we assess the moderating role of geographic agglomeration in reducing the need of vertical integration. Our results confirm the importance of technology and price uncertainty in influencing vertical integration; moreover, the misalignment variable is significant in the case of profitability, but not in the case of growth. Copyright © 2014 John Wiley & Sons, Ltd.     

Consumption insurance and entrepreneurial risk: Evidence from Italian micro-data

Using cross-sectional data from the Bank of Italy's Survey on Household Income and Wealth, we make an attempt to assess the relevance of entrepreneurial risk, i.e., idiosyncratic risk borne by firm owners while running their operations. Our new testing procedure will show that progressively more articulated forms of entrepreneurship do not enjoy a larger degree of risk sharing and will suggest some links between a larger or smaller degree of consumption insurance and variables such as net wealth, asset holding, and net indebtedness. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the corresponding institutions.     

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.     

Valuation effects of capital inflows: Evidence from emerging market economies

This paper studies valuation changes of capital inflows in 19 emerging market economies (EMEs). In most of the EMEs, we find that there are significant valuation changes and a positive rate of return on external liabilities by foreigners. Furthermore, the nonlinear effects of exchange rate movements on valuation changes are investigated using panel smooth transition regression models. Empirical results show that the transition is centered at approximately −22.3% of exchange rate change, which implies that when the exchange rate appreciates more than this level, foreign investment value gains increase considerably.     

Bayesian VARs: Specification Choices and Forecast Accuracy

In this paper we discuss how the point and density forecasting performance of Bayesian vector autoregressions (BVARs) is affected by a number of specification choices. We adopt as a benchmark a common specification in the literature, a BVAR with variables entering in levels and a prior modeled along the lines of Sims and Zha (International Economic Review 1998; 39 : 949–968). We then consider optimal choice of the tightness, of the lag length and of both; evaluate the relative merits of modeling in levels or growth rates; compare alternative approaches to h‐step‐ahead forecasting (direct, iterated and pseudo‐iterated); discuss the treatment of the error variance and of cross‐variable shrinkage; and assess rolling versus recursive estimation. Finally, we analyze the robustness of the results to the VAR size and composition (using also data for France, Canada and the UK, while the main analysis is for the USA). We obtain a large set of empirical results, but the overall message is that we find very small losses (and sometimes even gains) from the adoption of specification choices that make BVAR modeling quick and easy, in particular for point forecasting. This finding could therefore further enhance the diffusion of the BVAR as an econometric tool for a vast range of applications. Copyright © 2013 John Wiley & Sons, Ltd.     

Firm Complexity and Capital Structure: Evidence from Italian Diversified Firms

This paper examines the links between product diversification, international diversification and capital structure for a panel of medium and large Italian firms. The results indicate that the interaction between these two dimensions of diversification strategy has a negative and significant impact on leverage. Furthermore, debt maturity analysis reveals that firms pursuing a simultaneous dual diversification strategy have, in particular, lower long‐term debt ratios. Our findings support the hypothesis that the complexity that comes from diversification reduces debt levels. Copyright © 2014 John Wiley & Sons, Ltd.     

Cohesion Policy Funds and local government autonomy: Evidence from Italian municipalities

In this article we investigate the effect of the European Union (EU) Cohesion Policy funds dedicated to administrative capacity building on the local government autonomy for the Italian case focusing on municipalities taking part to the programming cycle 2007–13. From an empirical perspective, the causal impact is estimated using a Difference-in-Differences (DiD) design with continuous treatment combined with a Propensity Score Matching approach. We exploit a unique database developed by the open government initiative on cohesion policies in Italy (OpenCoesione), which collects detailed information at municipality level on financed EU projects. Our results show that the specific Cohesion Policy funds have a positive and significant effect on the local government autonomy measured in terms of taxation autonomy.     

Voluntary Adopters of Integrated Reporting – Evidence on Forecast Accuracy and Firm Value

This study investigates how integrated reporting (IR) creates value for investors. It examines how providers of financial capital benefit from an improved firm information environment provided by IR. Specifically, this study investigates the effect of voluntary IR disclosure on analyst earnings forecast accuracy as well as on firm value. To do so, we use an international sample of 167 listed companies that voluntarily publish an integrated report. Our analysis shows no significant effect of a voluntary IR publication on analyst earnings forecast accuracy and no significant effect on firm value. We thus do not find evidence for the fulfillment of IR's promises regarding improved information environment and value creation of voluntary adopters. We conclude that such companies might already have a relatively high level of transparency leading to an absent additional effect of IR disclosure. Positive effects of IR appear to be more relevant in environments where IR is mandatory.     

分析师盈利预测压力与企业投资效率——来自中国A股市场的证据

证券分析师盈利预测是市场预期的一个典型替代变量,其超出企业内部经营预期的部分会对企业产生压力,从而干扰经理人的决策和行为。通过构建盈利预测压力测算模型研究证券分析师盈利预测压力对企业投资决策的影响,并进一步考察分析师跟踪和企业政治联系对二者关系的调节作用。研究发现,分析师盈利预测压力与投资不足正相关,与过度投资不相关。这表明企业在面临分析师盈利预测压力时更倾向于减少投资,而不是冒险将资金用于高风险项目。进一步研究发现,分析师跟踪以及企业政治关联会负向调节盈利预测压力对投资不足行为的影响,外部监督的增强以及资源获取渠道的拓宽能够纠正企业在盈利预测压力下的非效率投资行为。     

Stale and Scale Effects in Markets-Based Accounting Research: Evidence from the Valuation of Dividends

Abstract

This study revisits prior research on the valuation of dividends in an accounting-based valuation framework. Using a battery of tests, we show that market value deflation is essential in market-based tests of dividend displacement and signalling because it controls for ‘stale’ information in addition to scale (size) differences across firms. For US firms, we show that after controlling for ‘stale’ information, the empirical association between dividends and market values switches from positive to negative. This switch is not explained by scale differences across firms. Further, we show that after controlling for staleness, the valuation of dividends remains positive for European firms. This result is explained by the relatively stronger association of dividends with future earnings in these settings (i.e. signalling). Lastly, our country-specific estimates of dividend valuation provide a potentially valuable index for studies aimed at examining the effects of accounting and securities regulation on information asymmetries in an international context.     

Entry regulations and labour market outcomes: Evidence from the Italian retail trade sector

The paper analyzes the relationship between entry regulations and employment in the Italian retail trade sector. In Italy the opening of large outlets is regulated at the regional level. First, by using differences-in-differences estimators the paper presents evidence that in regions with less stringent entry regulations, retail trade employment does not decrease. Second, the paper focuses on the effects of the rules implemented in Abruzzo and Marche, two otherwise close and similar Italian regions which adopted very different policies: the first set tight restrictions on the opening of large stores; the second did not impose substantial entry regulations. The results show that in Marche after the inception of the flexible regulations the share of total retail trade employment in total population increased by 0.8 percentage points more than in Abruzzo. Fiercer competition also led to a recomposition of employment in small retail shops. These findings are robust to a number of checks.     

Strategic Planning and Implementation Success in Public Service Organizations: Evidence from Canada

In this article, we examine the role that formal strategic planning plays in determining the success of strategy implementation in a set of more than 150 public service organizations from Canada. We also analyse the mediating effects of managerial involvement in strategic planning and the moderating effects of stakeholder uncertainty on the planning-implementation relationship. A structured online questionnaire was used to collect the data. Our findings suggest that formal strategic planning has a strong positive relationship with implementation, which, though mediated by managerial involvement, becomes even more salient in the face of stakeholder uncertainty. Several implications of these findings are discussed.     

Strategic Groups,Frontier Benchmarking and Performance Differences: Evidence from the UK Retail Grocery Industry*

ABSTRACT In this paper we seek to advance the theory and practice of strategic group theory by means of powerful benchmarking tools that allow the composition of strategic groups on the basis of empirically derived production function frontiers. The relative performance of firms is assessed based on multiple inputs and outputs and as a result, firms are associated with different segments of the efficient frontiers. These segments constitute strategic facets and are used in the current paper as strategic group variables. The strategic facets are composed by outlier firms in the sense that they satisfy the Pareto dominance criterion when compared with other firms. Such advancement offers significant advantages compared to the ‘average’ firm that is used traditionally as a basis to define strategic groups. The proposed methodology for the formation of strategic groups has been applied on a panel of data from the grocery industry in the UK in the period 1987–93. The results of the study confirmed the existence of three stable strategic groups and one with a more volatile membership. Performance differences were also identifiled both between and within strategic groups using as criteria traditional accounting methods and also the relative efficiency indices obtained from the benchmarking methodology applied to the panel of data.     

Signalling,financial hierarchy and agency theory as explanations for dividend behaviour: Evidence from Italian firm data

Starting from the traditional Lintner model, an asymmetric model of dividend behaviour is derived. It allows both the speed of adjustment and the desired pay-out structural parameters to vary according to firm- and time-specific economic conditions. The model is then tested on a sample of large Italian quoted and non-quoted firms. The main result of the econometric testing is that managers adjust more quickly when they have to reduce dividends than when they have to increase them. This finding is not consistent with the traditional view that firms are more reluctant to reduce than to increase dividends because of signalling problems. It is, however, consistent with the existence of a financial hierarchy. If internal sources of funds are cheaper managers will rationally adjust relatively quickly when they have to reduce dividends in order not to cut investment and will adjust relatively slowly when they have to increase them in order to build financial slack. One further interesting result observed is that quoted firms are found to fix a higher pay-out ratio than non-quoted firms.     

Strategic Activism and Nonmarket Strategy

Activist NGOs have increasingly foregone public politics and turned to private politics to change the practices of firms and industries. This paper focuses on private politics, activist strategies, and nonmarket strategies of targets. A formal theory of an encounter between an activist organization and a target is presented to examine strategies for lessening the chance of being a target and for addressing an activist challenge once it has occurred. The encounter between the activist and the target is viewed as competition. At the heart of that competition is an activist campaign, which is represented by a demand, a promised reward if the target meets the demand, and a threat of harm if the target rejects the demand. The model incorporates target selection by the activist, proactive measures and reputation building by a potential target to reduce the likelihood of being selected as a target, fighting a campaign, and credible commitment.     

Choice of Accounting Method for Valuation of Investment Securities: Evidence from Hong Kong Firms

This study examines whether Hong Kong managers choose “benchmark” or “alternative” valuation method for investment securities, after the Hong Kong SSAP 24 became effective starting with fiscal‐year ending December 31, 1999. Tests are conducted on a sample of 292 firms, out of which 155 Hong Kong firms reported unrealized gains and losses and 128 firms that did not report holding gains/losses, but reported investment securities. The findings indicate that firms with strong relative performance, i.e. current year's EPS higher than that of the last year, chose the alternative valuation method when the investment securities had holding gains and recognized the unrealized holding gains in the equity section of the balance sheet. This finding is consistent with the Cookie Jar hypothesis because these holding gains would be used in the income statement in future periods, when needed. With regard to firms with strong relative performance and holding losses, the findings indicate that the benchmark valuation was used. The losses were reported in the income statement to the extent that they did not reduce the EPS below that of the last year. This finding is consistent with the Income Smoothing Hypothesis, because the use of benchmark valuation reduced EPS of the current year to bring it in line with that of the last year. Evidence on firms with weak economic performance and holding gains or losses provided weak support to the Income Smoothing Hypothesis and Big Bath Hypothesis. Additionally, the results indicate that the firms with high debt‐equity ratio preferred the benchmark method and recorded securities at cost. This treatment provided managers with an opportunity to liquidate or reclassify the securities in future periods and use the accrued gains, when needed. The findings are inconclusive with regard to the impact of bonus plan on the choice of valuation method.     

Productivity Shocks and Labour Market Outcomes for Top Earners: Evidence from Italian Serie A

How are top earners affected by productivity shocks? We address this question using a unique longitudinal data set on the universe of professional football players in the Italian Serie A, representing 20% of top earners in Italy. We use traumatic injuries and adopt an IV strategy to provide causal estimates of the impact of productivity shocks on several labour market outcomes. We find that a 30-day injury substantially affects the probability of contract renegotiation and reduces net wages by around 12%. We show that this large penalty is due to employer's precautionary motives rather than to shock-induced reduction in current player's performance.