The pricing accuracy of alternative equity valuation models: Scandinavian evidence

In many decision contexts, there is a need for benchmark equity valuations, based on simplified modeling and publicly available information. Prior research on U.S. data however shows that the accuracy of such valuation models can be low and sensitive to the choice of model specifications and value driver predictions. In this paper, we test the applicability and pricing accuracy of three fundamental valuation (dividend discount, residual income, and abnormal earnings growth) models, all based on forecasts of company dividends, earnings, and/or equity book values. Extending prior research, we apply these models to Scandinavian firms with accounting data from the period 2005–2014, explicitly testing two approaches for the prediction of the value drivers—exogenously forecasted numbers versus projected historical numbers. Given access to the forecasted value drivers, the dividend discount model comes out as the most accurate valuation model. In particular, this holds in a comparison between the most parsimonious model specifications. The residual income valuation model generates the best pricing accuracy given the prediction of value drivers based on historical financial numbers. Notably, we observe pricing errors that in general are lower than what has been reported in prior U.S.‐based research for the dividend discount and the residual income valuation models. The pricing accuracy of the abnormal earnings growth models is surprisingly weak in the Scandinavian setting. However, these models improve somewhat after a couple of complexity adjustments, in particular with value driver predictions based on the projected history setting.     

On the ‘Disclosure Initiative – Principles of Disclosure’: The EAA Financial Reporting Standards Committee’s View

Abstract

This paper summarises the contents of a comment letter produced by a working group of 12 academics in response to the International Accounting Standards Board (IASB) Discussion Paper on principles of disclosure. The comment letter was submitted by the Financial Reporting Standards Committee (FRSC) of the European Accounting Association (EAA). The work includes reviews of relevant academic literature of areas related to the various questions posed by the IASB in the Discussion Paper, including the ‘disclosure problem’ and the objective of the project, the suggested principles of effective communication, the roles of the primary financial statements and notes, the location of information and the use of performance measures. The paper also discusses the disclosure of accounting policies, the objectives of centralised disclosure, and the New Zealand Accounting Standards Board staff’s approach to disclosure.     

Applications of a generalized metric in the analysis of iterated function systems

Summary. Iterated function systems make up an interesting class of stochastic processes which are useful for many types of stochastic modeling. In this paper we review and slightly generalize a contractivity condition guaranteeing uniqueness of invariant measures. Also, we examine how the invariant measure, and thus also the asymptotic behavior, of such a process is affected by perturbations of the defining functions and probabilities.Received: 15 September 2002, Revised: 29 October 2002, JEL Classification Numbers: C62, O41.I would like to thank Professor Göran Högnäs for his support. I am also greatly indebted to the Finnish Graduate School in Stochastics for my financial support and I would like to thank the anonymous referee for the helpful comments.     

Ambidextrous work in smart city project alliances: unpacking the role of human resource management systems

Abstract

Organizations that are competing in dynamic global markets are increasingly adopting ambidextrous strategies where exploration and exploitation capabilities are combined simultaneously. However, ambidextrous work raises new challenges for human resource management (HRM). Based on 21 interviews with managers in seven multinational firms in Europe, we investigate how ambidextrous work in smart city work is supported through HRM systems. Our findings suggest a complex mix of three different HRM systems (one at corporate and two at project levels) designed to support ambidextrous exploratory and exploitation work. Specifically, corporate HRM systems focused on incentives and development of dual capabilities for smart city managers (SCMs). At project levels, interconnected explorative and exploitative HRM systems offered tailored managerial tools to support social integration and knowledge management between internal and external employees. Theoretical contributions, future research paths, and practical implications are addressed.     

Implementing Generality while Reducing the Risk for Fiscal Explosion

The generality principle, advocatedby Buchanan and Congleton (1998), requires that political decisionstreat all citizens equally qua citizens. The effects of implementingsuch a constitutional rule on lobbying, public expenditures,economic efficiency, and disposable incomes are explored. Themain contribution is to propose a way of mitigating potentiallynegative effects not discussed by Buchanan and Congleton, especiallythe risk for fiscal explosion. It is suggested that if generalityis augmented with a rule stating that public expenditures asa share of GDP are not to rise, this will probably render generalitymore attractive than non-generality for most citizens.     

Weather Derivative Risk Measures for Extreme Events

We consider pricing weather derivatives for use as protection against weather extremes by using max-stable processes to estimate risk measures. These derivatives are not currently traded on any open markets, but their use could help some institutions manage weather risks from extreme events. The central challenge is to model the dependence of payments, which increases the risk of holding multiple weather derivatives. The method described utilizes results from spatial statistics and extreme value theory to first model extremes in the weather as a max-stable process, and then simulate payments for a general collection of weather derivatives. As the joint likelihood function for max-stable processes is unavailable, we use two approaches: The first is based on the composite likelihood, and the second is based on approximate Bayesian computing (ABC). Both capture the spatial dependence of payments. To incorporate parameter uncertainty into the pricing model, we use bootstrapping with the composite likelihood approach, while the ABC method naturally incorporates parameter uncertainty. We show that the additional risk from the spatial dependence of payments can be quite substantial, and that the methods discussed can compute standard actuarial risk measures in both a frequentist and Bayesian setting.     

The persistence of international accounting differences as measured on transition to IFRS

The international accounting classification literature emphasises the importance of understanding how institutional factors shape accounting regulations and practices. With the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union and Australia in 2005, our empirical study examines whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems. Using IFRS as the yardstick, we find statistically significant differences in the measurement of shareholders’ equity as between strong (Class A) versus weak (Class B) equity financing systems, common law versus code law systems and cultural systems based on ‘Anglo’, ‘Nordic’ and ‘More Developed Latin’ cultural groups. With regard to the measurement of net income, however, we find statistically significant differences only in respect of strong (Class A) versus weak (Class B) equity financing systems. Our findings demonstrate that traditional international accounting system differences still persisted at the time of IFRS adoption even after long periods of harmonisation and growing international accounting convergence.     

Trust and growth: a shaky relationship

We conduct an extensive robustness analysis of the relationship between trust and growth by investigating a later time period and a bigger sample than in previous studies. In addition to robustness tests that focus on model uncertainty, we systematize the investigation of outlier influence on the results by using the robust estimation technique Least Trimmed Squares. We find that when outliers (especially China) are removed, the trust-growth relationship is no longer robust. On average, the trust coefficient is half as large as in previous findings.      

Managerial Stock Options and the Hedging Premium

Previous studies have found mixed evidence on whether hedging increases firm value. Some studies have shown that managerial incentives may influence firm hedging. In this paper we provide evidence that when hedging is based upon incentives from managers' options, firm value decreases.     

Prevalence and Persistence of High-Growth Entrepreneurship: Which Institutions Matter Most?

Journal of Industry, Competition and Trade - Which institutions encourage high-growth entrepreneurship to emerge and to be sustained? Building on institutional theory, this study exploits a sample...