This paper aims to empirically investigate the market-to-book/return on equity valuation model.
The authors use a worldwide commodities sector panel of 6,323 firms from 69 countries with annual observations from 1999 to 2010 to estimate panel ordinary least squares (OLS), instrumental variables (IV) and quantile regressions. They also measure the impact of return on equity on market-to-book uncovering value versus growth and positive versus negative profitability dimensions.
The new evidence is that the impact of return on equity on market-to-book is time-varying and declining across the years in the sample. There is positive and strong persistence in the market-to-book of companies in this sector worldwide, but value stocks are more persistent than growth stocks. The coefficient of return on equity is positive at the 10th percentile of the market-to-book, but it becomes negative for growth stocks at 90th percentiles. Conditional on negative profitability, the coefficient of return on equity on market-to-book is negative for growth stocks. The effect of the S&P500 volatility index (VIX) is negative, significant and large in magnitude, but declines in absolute value, as the quantiles increase toward the upper 90th percentile.
The commodities sector is important for countries that depend on it for development.
The paper provides a rich panel data approach, and the market-to-book/return on equity valuation model is naturally applied to the commodities sector, as this sector tends to have more tangibles relative to intangibles.
The authors thank the useful comments and suggestions of three anonymous referees for this journal and the editors; the participants of the Brazilian Society of Finance (SBFin) at PUC Rio 2013, in particular, the discussant Joao Mergulhao; and Rodrigo Wagner, Jeff Zabel and Thiago Alexandrino. The authors thank Ernest Kim Song for able research assistance in collecting and arranging the data from WorldScope. Any errors are their own.
Bianconi, M. and Yoshino, J.A. (2017), "Valuation of the worldwide commodities sector: The role of market-to-book and return on equity", Studies in Economics and Finance, Vol. 34 No. 4, pp. 555-579. https://doi.org/10.1108/SEF-04-2016-0095
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