Errors and questionable judgments in analysts’ DCF models

We investigate the number of and reasons for errors and questionable judgments that sell-side equity analysts make in constructing and executing discounted cash flow (DCF) equity valuation models. For a sample of 120 DCF models detailed in reports issued by U.S. brokers in 2012 and 2013, we estimate that analysts make a median of three theory-related and/or execution errors and four questionable economic judgments per DCF. Recalculating analysts’ DCFs after correcting for major errors changes analysts’ mean valuations and target prices by between ?2 and 14 % per error. Based on face-to-face interviews with analysts and those who oversee them, we conclude that analysts’ DCF modeling behavior is semi-sophisticated in the sense that analysts genuinely make mistakes regarding certain aspects of correctly valuing equity but also respond rationally to the incentives they face, particularly the reality that they are not directly compensated for being textbook DCF correct.     

Japanese multinationals: How different are they?

Encarnation, D.J. (Ed.). (1999). Japanese Multina‐tionals in Asia, Regional Operations in Comparative Perspective. New York: Oxford University Press, 301 pages, ISBN 0‐19‐512065‐5. Beamish, P.W., Delios, A., & Lecraw, D.J. (Eds.). 1997. Japanese Multinationals in the Global Economy. Cheltenham, UK: Edward Elgar, 352 pages, ISBN 1‐85898‐720‐2. Beechler, S.L., & Bird, A. (Eds.). (1999). Japanese Multinationals Abroad, Individual and Organizational Learning. New York: Oxford University Press, 283 pages, ISBN 0‐19‐511925‐8.     

Investing in Health: A Macroeconomic Exploration of Short-Run and Long-Run Trade-Offs

This paper aims to unravel the competing effects of health investment. It explores, both analytically and numerically, the equilibrium shift and transitional dynamics after a one-time policy of health investment. We find that such a policy improves health status in the long run, but harms economic growth in both the short- and long-term. The relative sizes of these competing effects depend on the specific health parameters. Within the plausible range for the value of health relative to consumption, households gain welfare in the long run as long as the effectiveness of labor in health production is large. The expanded health sector policy makes households worse off only if labor is rather unproductive in producing health and if households value health relatively little. Nevertheless, the findings challenge the policy recommendations of the World Bank (1993) and World Health Organization (2001) in that good health does not necessarily increase the productivity of workers and the economic growth rate. We hope that the relative simplicity of our model, compared to the existing theoretical literature, can help close the gap between formal academic work on this topic and actual debates among policy makers in both developed and developing countries.     

The supraview of return predictive signals

This study seeks to inform investment academics and practitioners by describing and analyzing the population of return predictive signals (RPS) publicly identified over the 40-year period 1970–2010. Our supraview brings to light new facts about RPS, including that more than 330 signals have been reported; the properties of newly discovered RPS are stable over time; and RPS with higher mean returns have larger standard deviations of returns and also higher Sharpe ratios. Using a sample of 39 readily programmed RPS, we estimate that the average cross-correlation of RPS returns is close to zero and that the average correlation between RPS returns and the market is reliably negative. Abstracting from implementation costs, this implies that portfolios of RPS either on their own or in combination with the market will tend to have quite high Sharpe ratios. For academics who seek to document that they have found a genuinely new RPS, we show that the probability that a randomly chosen RPS has a positive alpha after being orthogonalized against five (25) other randomly chosen RPS is 62 % (32 %), suggesting that the returns of a potentially new RPS need to be orthogonalized against the returns of some but not all pre-existing RPS. Finally, we posit that our findings pose a challenge to investment academics in that they imply that either US stock markets are pervasively inefficient, or there exist a much larger number of rationally priced sources of risk in equity returns than previously thought.     

Color or culture?: Wage differences among non-hispanic black males,hispanic black males and hispanic white males

The analysis of the determinants of wage differences between Hispanic black, Hispanic white and non-Hispanic black males undertaken in this research does not support the contention that cultural differences are more significant than color differences in the generation of racial wage gaps.     

The gap at the top: Relative occupational earnings disadvantages of the black middle class

Data are presented in this article indicating that the disparity in the earnings of blacks and whites in upper level white-collar occupations is greater than that between their counterparts in blue-collar occupations. Moreover it appears that very little of the racial earnings differences in either occupational category can be explained by so-called human capital differences.