A Comparison of Dividend,Cash Flow,and Earnings Approaches to Equity Valuation*

Standard formulas for valuing the equity of going concerns require forecasting payoffs to infinity but practical analysis requires that payoffs be forecasted over finite horizons. This truncation inevitably involves often-troublesome terminal value calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when each is applied with finite-horizon forecasts. Valuations based on average ex post payoffs over various horizons, with and without terminal value calculations, are compared with ex ante market prices to discover the error introduced by each technique in truncating the horizon. Valuation errors are lower using accrual earnings techniques rather than cash flow and dividend discounting techniques. The accounting features that make a given technique less than ideal for finite horizon analysis are also detailed. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined.     

Towards a More General Approach to Trade Liberalization

Despite the frequency with which they have been promoted as a model of development. East Asian trade policies have had little influence on the normative economics of trade reform. In contrast to directly dismantling protection, developing countries have often provided concessional import rights which override existing protection. These instruments include EPZs and duty remission. This paper accommodates these instruments of 'new trade liberalization' within a more general understanding of trade liberalization illustrating their similarities and their differences. Both old and new trade liberalization can, on their own, bring about complete free trade. Needless to say, so far, neither has!     

THE IMPACT OF CHILDCARE COSTS ON THE FULL-TIME/PART-TIME EMPLOYMENT DECISIONS OF AUSTRALIAN MOTHERS

Using data from the HILDA (Household Income and Labour Dynamics), this paper examines the implications of childcare costs on maternal employment status by distinguishing between full-time and part-time work. Our empirical approach uses an ordered probit model taking into account the endogeneity associated with both wages and childcare costs. Results indicate that childcare costs have a statistically insignificant effect on the decision to work either full time or part time. Moreover, the reported elasticities of part-time and full-time work with respect to childcare costs are relatively low. Finally, our results indicate that Australian mothers respond to an increase in wages by increasing both their full-time and part-time employment. Conversely, an increase in the number of young children (particularly under four years of age) and an increase in non-labour income reduce the likelihood of the mother is observed to be working.     

MONETARY POLICY ACTIVISM UNDER MANAGED-FLOATING EXCHANGE RATES: A CROSS-COUNTRY COMPARISON

This paper assesses the degree and pattern of monetary policy activism in the United States, Canada, West Germany, the United Kingdom, and Japan during the recent period in which managed-floating exchange rates prevailed. Floating exchange rates enhance the potency of a discretionary monetary policy. Yet central banks in these countries shifted toward less discretionary monetary targeting during the late 1970s in response to rising inflationary pressures and expectations. But whether such targeting actually reduced policy activism is unclear since targets were expressed in wide ranges and often were missed. Following 1981, at least three of these countries–the United States, Canada, and the United Kingdom–reverted to an avowedly more discretionary pattern of response to changes in real demand pressures, interest rates, and exchange rates. Since mid-1986, Germany, the United Kingdom, and Japan–and, to a lesser extent, Canada–have intervened heavily in the foreign exchange market and so have greatly increased their official dollar holdings. Moreover, through August 1987, the effects of this intervention on these countries' domestic money supplies apparently have been sterilized only partially.