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1 – 10 of over 10000Georgios Papanastasopoulos, Dimitrios Thomakos and Tao Wang
The purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free…
Abstract
Purpose
The purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free cash flow yield (free cash flows scaled by price).
Design/methodology/approach
The paper utilizes portfolio‐level tests and cross‐sectional regressions.
Findings
In line with the literature on contrarian portfolios, this paper finds that firms with low (high) free cash flow yield are experiencing low (high) returns. However, only when an investor buys (sells) stocks of firms with high (low) free cash flow yield that distribute (raise) capital, his zero‐cost portfolio is significant. These findings are robust, irrespective of the financing vehicle (equity or debt). Overall, their evidence suggests that distinctions between the value/growth anomaly and the external financing anomaly partially disappear, if one is willing to employ free cash flow yield as a proxy of the former anomaly.
Originality/value
The paper enhances one's understanding of the relation between asset pricing anomalies.
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Simulation is a powerful analytical tool which facilitates aninvestigation of financial risk through the examination of repeatedoutcomes from the same model. It is not, however…
Abstract
Simulation is a powerful analytical tool which facilitates an investigation of financial risk through the examination of repeated outcomes from the same model. It is not, however, an easy matter to use simulation in a property investment context due to the existence of complex relationships between the fundamental components (such as the periodic cash flows, vacancy rates, letting up periods and capitalization rates). Seeks to examine a simple investment scenario in which the variations in net annual cash flows and final capitalization rate determine the overall viability of the investment. Shows that the relationship between these two variables and between the net annual cash flows over time significantly increases the investment′s risk. The use of asymmetric variables to describe these property characteristics is also discussed as are the interpretation of “expected” outcomes as either the “average” and the “most likely” result. These are all critical considerations if the simulation model is to provide a reasonable representation of the true investment situation and for the simulation results to be useful in the investment decision‐making process.
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Patrick McAllister and Pavlos Loizou
This paper aims to analyse the appraisal of a specialised form of real estate – data centres – that has a unique blend of locational, physical and technological characteristics…
Abstract
Purpose
This paper aims to analyse the appraisal of a specialised form of real estate – data centres – that has a unique blend of locational, physical and technological characteristics that differentiate it from conventional real estate assets. Market immaturity, limited trading and a lack of pricing signals enhance levels of appraisal uncertainty and disagreement relative to conventional real estate assets.
Design/methodology/approach
Given the problems of applying standard discounted cash flow, an approach to appraisal is proposed that uses pricing signals from traded cash flows that are similar to the cash flows generated from data centres. Based on “the law of one price”, it is assumed that two assets that are expected to generate identical cash flows in the future must have the same value now. It is suggested that the expected cash flow of assets should be analysed over the life cycle of the building. Corporate bond yields are used to provide a proxy for the appropriate discount rates for lease income. Since liabilities are quite diverse, a number of proxies are suggested as discount and capitalisation rates including indexed‐linked, fixed interest and zero‐coupon bonds.
Findings
The application of conventional discounted cash flow approaches to the appraisal of data centres requires information about a wide range of inputs that is difficult to derive from market signals or estimate analytically. In practice, discounted cash flow appraisals of data centre facilities are forced to incorporate non‐market assumptions that are inevitably subjective. Cash flows from data centres tend to be more complicated because of the high levels of current and capital expenditure compared with conventional assets. This requires an understanding of the appraisal of liabilities as well as income. Whilst the use of price information from similar cash flows such as corporate bonds is helpful, there are rarely assets and liabilities that have identical cash flows and risks and some approximation is necessary.
Originality/value
The digitalisation of business and society has produced a different form of real estate asset that is specialised, physically complex and whose operation, maintenance and management require specialist staffing and high levels of current and capital expenditure. The complexity of the cash flows and the lack of active trading create significant appraisal problems. This paper proposes an alternative approach to appraisal that utilises external pricing signals to appraise the various incomes and costs.
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Syed Alamdar Ali Shah, Raditya Sukmana and Bayu Arie Fianto
The purpose of this research is to propose a framework for research on Macaulay duration and establish future research directions.
Abstract
Purpose
The purpose of this research is to propose a framework for research on Macaulay duration and establish future research directions.
Design/methodology/approach
Thematic, bibliometric and content analyses have been used to review 168 research papers published between 1938 and 2019 taken from ISI Web of Science and Scopus contributed by leading authors, journals and regulatory bodies.
Findings
Identification and integration of themes of duration theory, duration model development and duration model implementation leading to unattended research gaps, and framework for research on Macaulay duration.
Research limitations/implications
The study is based on an extensive review of the literature to extract important themes, research gaps and frameworks. It does not empirically investigate significance of Macaulay duration and various sectors.
Practical implications
This research has several aspects that are helpful for practitioners. Macaulay duration has been the subject of empirical research only without any guiding framework. This research provides a platform to initiate profound researches in various areas of finance. Various proposed models are required to be tested under holistic approach in conventional and emerging fields, especially in Islamic settings.
Originality/value
This research highlights, research themes leading to framework, research gaps and factors that are crucial in developing, extending and testing duration models leading to enhancement of theoretical base of Macaulay duration.
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Michel Baroni, Fabrice Barthélémy and Mahdi Mokrane
The purpose of this paper is to offer a framework for computing optimal investment holding periods for real estate portfolios.
Abstract
Purpose
The purpose of this paper is to offer a framework for computing optimal investment holding periods for real estate portfolios.
Design/methodology/approach
The analysis is set within a standard DCF modelling framework and it is shown that it is not adapted to offer sufficient insight into the mechanics leading to optimal holding periods. A richer framework is offered that enables the portfolios terminal value to behave according to a simple diffusion process.
Findings
The findings show that optimal holding periods for real estate investment portfolios exist within very precise conditions. The key parameters are the investor's weighted average cost of capital (WACC), the cash flow growth rate during the investment period, and the investment's net initial yield. The key finding is (loosely speaking) that, if the investor's cost of capital is outpaced by (the sum of) the portfolio's net initial yield and the cash flow growth rate, then an optimal holding period exists and can be precisely computed. Numerical examples are provided to illustrate these findings.
Originality/value
Standard financial theory does not specify a consistent methodology for choosing the optimal investment horizon in investment analysis and in particular in discounted cash flow (DCF) modelling. This problem may be particularly acute in real estate investment analysis and valuation, as investment horizons are often arbitrarily chosen. The paper proves that investment horizon may strongly influence net present value.
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This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt. If the…
Abstract
This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt. If the regulator seeks to ensure that the present value of the future cash flows to equity holders equals their initial investment then the only choice of term for the risk free rate that can achieve this is that matching the regulatory cycle, but it also requires that the firm match its debt duration to the regulatory cycle. Failure of the firm to do so leads to cash flows to equity holders whose net present value will tend to be negative, and will also inflict interest rate risk upon equity holders. This provides the firm with strong incentives to match its debt duration to the regulatory cycle.
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Belverd E. Needles, Marian Powers, Mark L. Frigo and Anton Shigaev
The present study investigates whether companies that exhibit high performance characteristics in the pre-financial crisis period can maintain their high performance in the…
Abstract
Purpose
The present study investigates whether companies that exhibit high performance characteristics in the pre-financial crisis period can maintain their high performance in the financial crisis period of 2007–2009 and, in particular, the post-financial crisis period of 2010–2011.
Methodology
The current study of 1,473 companies in 25 countries and 66 industries (MSCI index) (1) extends the empirical research of prior studies through the year 2011; (2) identifies the operating characteristics (performance drivers and performance measures) and associated risk factors which were most critical with regard to sustaining, exiting, and entering HPC companies during the five 10-year periods since 1998–2007, and (3) summarizes conclusions about HPC results from the 13 ten-year periods (1989–1998 to 2002–2011) in this stream of research.
Findings
(1) Companies that sustain high performance over periods of financial stress clearly excel in asset turnover performance driver and on the performance measures of growth in revenues, profit margin, return on equity and return on assets. Sustaining HPC had less debt than other companies and consistent cash flow yields. Operating turnover ratios became less important in recent years as an indicator of high performance. (2) Although exiting companies maintained profitability, financial risk and liquidity, the key factor in their dropping out of HPC status is their failure to grow revenues. (3) Entering companies did not exhibit the superior performance in all categories.
Practical implications and value
The results provide strategic direction for management of companies that aspire to HPC status and to maintain HPC status once gained, particularly in times of global financial stress.
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Tarek Eldomiaty, Ola Attia, Wael Mostafa and Mina Kamal
The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the…
Abstract
The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the components of each model is considered, the informative and efficient dividend payout decisions require that managers have to focus on the significant component(s) only. This study examines the cointegration, significance, and explanatory power of those components empirically. The expected outcomes serve two objectives. First, on an academic level, it is interesting to examine the extent to which payout practices meet the premises of the earnings and free cash flow models. The latter considers dividends and financing decisions as two faces of the same coin. Second, on a professional level, the outcomes help focus the management’s efforts on the activities that can be performed when considering a change in dividend growth rates.
This study uses data for the firms listed in two indexes: Dow Jones Industrial Average (DJIA30) and NASDAQ100. The data cover quarterly periods from 30 June 1989 to 31 March 2011. The methodology includes (a) cointegration analysis in order to test for model specification and (b) classical regression in order to examine the explanatory power of the components of earnings and free cash flow models.
The results conclude that: (a) Dividends growth rates are cointegrated with the two models significantly; (b) Dividend growth rates are significantly and positively associated with growth in sales and cost of goods sold only. Accordingly, these are the two activities that firms’ management need to focus on when considering a decision to change dividend growth rates, (c) The components of the earnings and free cash flow models explain very little of the variations in dividends growth rates. The results are to be considered a call for further research on the external (market-level) determinants that explain the variations in dividends growth rates. Forthcoming research must separate the effects of firm-level and market-level in order to reach clear judgments on the determinants of dividends growth rates.
This study contributes to the related literature in terms of offering updated robust empirical evidence that the decision to change dividend growth rate is discretionary to a large extent. That is, dividend decisions do not match the propositions of the earnings and free cash flow models entirely. In addition, the results offer solid evidence that financing trends in the period 1989–2011 showed heavy dependence on debt financing compared to other related studies that showed heavy dependence on equity financing during the previous period 1974–1984.
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The purpose of this paper is to examine housing speculation in Auckland, New Zealand, the second most unaffordable market in the world.
Abstract
Purpose
The purpose of this paper is to examine housing speculation in Auckland, New Zealand, the second most unaffordable market in the world.
Design/methodology/approach
The study considers rental property purchases from 2002 to 2016 within the Auckland region. The authors apply a simple cash flow model that emulates the before-tax investment calculations used during purchasers’ due diligence. From this model, the authors determine whether purchases involved speculation on capital gains or not and the authors estimate the degree of speculation at the transaction level.
Findings
The authors find that housing speculation in Auckland is endemic and its housing market is a politically condoned, finance-fuelled casino with investors broadly betting on tax-free capital gains.
Social implications
Although political leaders have decried that the “speculation-driven housing bubble in Auckland is a social and economic disaster”, the government’s main anti-speculation tool – the Income Tax Act’s intention test – sits idle and inoperable. By holstering this key policy tool, politicians foster housing speculation and use residential property investment to buttress New Zealand’s asset-based welfare system.
Originality/value
The authors develop novel methods to objectively distinguish speculators from genuine investors, measure the speculative pressure applied by individual rental property purchasers and outline an evidence-based approach to operationalise New Zealand’s currently impotent anti-speculation tool, the intention test.
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In a recent article, Dr Michael J. Crean (1993) asserts thatreinvestment rates of interest must be explicitly taken into accountwhen using internal rate of return (IRR) to compare…
Abstract
In a recent article, Dr Michael J. Crean (1993) asserts that reinvestment rates of interest must be explicitly taken into account when using internal rate of return (IRR) to compare mutually exclusive investment opportunities. To that end and to measure the risk perceived to be associated with reinvestment, Dr Crean presents two new concepts, namely the combined result of externally averaged numbers (CREAN) and the reinvestment rate risk ratio (R4). Presents a response to Dr Crean′s article. Begins by showing that the bulk of Dr Crean′s analysis is a reproduction of research that appeared in the finance literature more than two decades ago. It is also shown that variants of IRR which explicitly take reinvestment opportunities into account are of low economic validity. Such measures offer no benefit to naïve investors, since they are forced to assume that the spot rates of interest determined in the financial markets already incorporate a consensus view of future reinvestment opportunities. Selective investors are also not well served by such measures as the CREAN, as they (just like IRR) cannot be used as an absolute measure of investment attractiveness or to compare mutually exclusive alternatives in the absence of information on the market price of risk. Concludes by taking issue with Dr Crean′s assertion that duration and the R4 should both be used to gauge and compare the attractiveness of investments.
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