Author: David Schröder Publisher: ISBN: Category : Languages : en Pages : 65
Book Description
This paper re-examines the duration-based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross-sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration-based explanation of the value premium that explains the value premium with cross-sectional differences in the firm's cash flow timing, we find that short-horizon stocks have lower (expected) returns than long-horizon stocks. This result is consistent with an upward-sloping equity yield curve.
Author: Michael Weber Publisher: ISBN: Category : Cash flow Languages : en Pages : 57
Book Description
The term structure of equity returns is downward-sloping: stocks with high cash flow duration earn 1.10% per month lower returns than short-duration stocks in the cross section. I create a measure of cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can explain only 50% of the return differential, and the difference in returns is three times larger after periods of high investor sentiment. I use institutional ownership as a proxy for short-sale constraints, and find the negative cross-sectional relationship between cash flow duration and returns is only contained within short-sale constrained stocks.
Author: Kothai Priyadharshini Alagarsamy Publisher: ISBN: Category : Languages : en Pages : 131
Book Description
This dissertation investigates the cross-sectional implications of equity duration, the weighted average time for shareholders to receive cash-flows from a firm in which weights are the ratio of the firm's discounted future cash-flows to the firm's price. The first chapter investigates techniques to more accurately measure equity duration. The second chapter examines the pervasiveness of the default risk puzzle that high default risk (HDR) firms earn lower abnormal returns under existing asset pricing models than low default risk (LDR) firms. The third chapter examines whether firms that differ in default risk also differ in equity duration. In the first chapter, I examine whether cross-sectional variation in firm characteristics affects equity duration of firms. Compared to the existing estimation method, a duration measurement technique that accounts for cross-sectional variation in growth opportunities reduces firm cash-flow forecasting error scaled by the firm market-value throughout the cash-flow projection horizon (ten years). The spread in average scaled forecasting error between the two techniques is 24.16% at the end of the ten years. This less noisy cash-flow prediction translates into a longer duration differential (11.98 years) and a larger return spread (-1.83% per month) between the top and bottom decile of firms differing in equity duration than the previously thought duration differential (8.71 years) and return spread (-1.08% per month). Existing risk factors span only 43% of the new return spread. The new technique also implies a steeper sloped term structure of equity risk premium, a 1.83% decrease as opposed to 1.48% decrease in monthly mean excess returns over the risk-free rate for a one-year increase in equity duration. This chapter suggests that accounting for cross-sectional variation in firm characteristics results in a less noisy measure of equity duration. In the second chapter, I examine whether the default risk puzzle is pervasive across firms. The top 40th percentile of default risk firms can either delist, recover, or possess elevated default risk at the end of the sample. Irrespective of the paths, these firms earn lower abnormal returns under Fama and French (1993) three-factor model than the bottom 40th percentile of default risk firms. Further, firms that recover from elevated default risk levels earn significant positive Fama and French (1993) three-factor alphas. The alphas persist despite allowing six months for the market to assimilate earnings information before rebalancing default risk portfolios, suggesting the possibility of a missed pricing factor. In the third chapter, I investigate whether firms with elevated default risk also have elevated equity duration and earn lower returns than LDR firms due to the downward-sloping term structure of equity risk premium. In expectation, HDR firms take longer than LDR firms to generate cash-flows for shareholders because HDR firms may use most of their short-term cash-flows to ensure their survival. Consequently, equity duration for HDR firms is 4.03 years longer than that for LDR firms. An arbitrage portfolio that buys the top decile and sells the bottom decile of firms differing in equity duration based on the new technique (chapter 1) reduces the default risk puzzle by 57% on the value-weighted arbitrage portfolio that buys the top quintile and sells the bottom quintile of default risk firms. This chapter suggests that equity duration has implications for the cross-section of returns.
Author: Olga Fullana Publisher: ISBN: Category : Languages : en Pages : 53
Book Description
In a seminal paper, Dechow, Sloan and Soliman (2004) develop a price-implied measure for equity duration and for its estimation they employ parsimonious but relatively crude procedures. Hence, these authors claim that improvements in procedures should lead to more accurate and useful estimates of their measure. Within this context, we estimate the implied equity duration but using industry-specific parameters for forecasting and discounting the future cash flows of listed firms as opposed to the market-estimated parameters used previously. We show that when we move to estimation based on industry-specific parameters, significant differences arise in absolute, relative and rank terms. We also provide evidence that the new procedures improve the ability of implied equity duration to capture stock price risk. When we seek the source of this improvement, we find that it is due to a better capture of both the market risk and residual risk of the market asset-pricing model. As expected, the higher the difference in the estimates of duration, the higher the improvement in measuring price risk, but the results also show that the highest improvements are given when implied equity duration based on market parameters performs poorly as a price-risk measure. Thus, we conclude that the cost of being parsimonious in estimating firms' duration is high on average and also quite variable across firms, both quantitatively and qualitatively. Moreover, this cost is large enough to reverse the duration-based ranking order of firms and to result in estimated durations without the ability to measure price risk.
Author: Jan Viebig Publisher: John Wiley & Sons ISBN: 0470758805 Category : Business & Economics Languages : en Pages : 438
Book Description
Equity Valuation: Models from the Leading Investment Banks is a clear and reader-friendly guide to how today’s leading investment banks analyze firms. Editors Jan Viebig and Thorsten Poddig bring together expertise from UBS, Morgan Stanley, DWS Investment GmbH and Credit Suisse, providing a unique analysis of leading equity valuation models, from the very individuals who use them. Filled with real world insights, practical examples and theoretical approaches, the book will examine the strengths and weaknesses of some of the leading valuation approaches, helping readers understand how analysts: · estimate cash flows · calculate discount rates · adjust for accounting distortions · take uncertainty into consideration Written for investment professionals, corporate managers and anyone interested in developing their understanding of this key area, Equity Valuation: Models from the Leading Investment Banks will arm readers with the latest thinking and depth of knowledge necessary to make the right decisions in their valuation methodologies.
Author: McKinsey & Company Inc. Publisher: John Wiley & Sons ISBN: 1118873688 Category : Business & Economics Languages : en Pages : 852
Book Description
McKinsey & Company's #1 best-selling guide to corporate valuation, now in its sixth edition Valuation is the single best guide of its kind, helping financial professionals worldwide excel at measuring, managing, and maximizing shareholder and company value. This new sixth edition provides insights on the strategic advantages of value-based management, complete detailed instruction, and nuances managers should know about valuation and valuation techniques as applied to different industries, emerging markets, and other special situations. The accompanying DCF model download allows you to complete computations automatically for error-free analysis and valuation of real companies. The model ensures that all important measures, such as return on investment capital and free cash flow are calculated correctly, so you can focus on the company's performance rather than computational errors. Valuation lies at the crossroads of corporate strategy and finance. In today's economy, it has become an essential role—and one that requires excellence at all points. This guide shows you everything you need to know, and gives you the understanding you need to be effective. Estimate the value of business strategies to drive better decision making Understand which business units a corporate parent is best positioned to own Assess major transactions, including acquisitions, divestitures, and restructurings Design a capital structure that supports strategy and minimizes risk As the valuation function becomes ever more central to long- and short-term strategy, analysts and managers need an authoritative reference to turn to for answers to challenging situations. Valuation stands ahead of the field for its reputation, quality, and prestige, putting the solutions you need right at your fingertips.
Author: McKinsey & Company Inc. Publisher: John Wiley & Sons ISBN: 0471738964 Category : Business & Economics Languages : en Pages : 528
Book Description
Hailed by financial professionals worldwide as the single best guide of its kind, Valuation, Fourth Edition is thoroughly revised and expanded to reflect business conditions in today's volatile global economy. Valuation provides up-to-date insights and practical advice on how to create, manage, and measure an organization's value. Along with all-new case studies that illustrate how valuation techniques and principles are applied in real-world situations, this comprehensive guide has been updated to reflect the events of the Internet bubble and its effect on stock markets, new developments in academic finance, changes in accounting rules (both U. S. and IFRS), and an enhanced global perspective. This edition contains the solid framework that managers at all levels, investors, and students have come to trust.
Author: David A. Holland Publisher: John Wiley & Sons ISBN: 1119440483 Category : Business & Economics Languages : en Pages : 421
Book Description
Beyond Earnings is targeted at investors, financial professionals, and students who want to improve their ability to analyze financial statements, forecast cash flows, and ultimately value a company. The authors demonstrate that reported earnings are easily gamed by accounting shenanigans and reveal how commonly used profitability measures such as return on equity can be misleading. Because earnings and P/E ratios are too unreliable for valuation, this book takes you beyond earnings and shows you how to apply the HOLT CFROI and Economic Profit framework in a step-by-step manner. A better measure of profitability results in improved capital allocation decisions and fundamental valuations. This ground-breaking book offers the first practical in-depth discussion of how profitability and growth fade, and shows how to put this information to work right away. The authors introduce their trailblazing Fundamental Pricing Model which includes fade as an adjustable value driver and can be used to value the impact of business model disruption. As the authors explain, the key to superior stock picking is understanding the expectations embedded in a stock’s price and having a clear view of whether the company can beat those expectations. The HOLT framework has been rigorously field tested for over 40 years by global investment professionals to help them make better stock picks and by corporate managers to understand the expectations embedded in their stock price. Beyond Earnings is an indispensable guide for investors who want to improve their odds of outperforming the competition.
Author: David Schröder
Author: Michael Weber
Author: Kothai Priyadharshini Alagarsamy
Author: Olga Fullana
Author: Jan Viebig
Author: McKinsey & Company Inc.
Author: McKinsey & Company Inc.
Author: George Joseph Stigler
Author: 
Author: David A. Holland