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Article
Publication date: 1 January 2005

Janis K. Zaima, Howard F. Turetsky and Bruce Cochran

Studies that examine the relationship of economic value added (EVA) to market value did not isolate the EVA effect in conjunction with controlling for the economic effect…

Abstract

Studies that examine the relationship of economic value added (EVA) to market value did not isolate the EVA effect in conjunction with controlling for the economic effect of the market. Since the EVA metric is viewed as value‐added apart from the market, operational managers will benefit from a procedure that separates the market driven versus firm driven (EVA) effects. Our paper examines the effects of the economy and EVA on MVA. The results indicate that EVA and GDP significantly affect MVA. Furthermore, the MVA‐EVA relationship shows a systematic bias between the largest MVA firms and the smallest MVA firms. Overall, our study provides implications for corporate executives utilizing EVA to evaluate managerial performance linked to MVA.

Details

Review of Accounting and Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 20 February 2009

Kenneth Leong, Marco Pagani and Janis K. Zaima

Past studies have shown that investment strategy using two popular metrics, the earnings‐price ratio (EP) and book‐to‐market ratio (BM) enable investors to reap abnormal…

Abstract

Purpose

Past studies have shown that investment strategy using two popular metrics, the earnings‐price ratio (EP) and book‐to‐market ratio (BM) enable investors to reap abnormal returns. More recent development of another ratio, economic value‐added‐to‐market value (EVAM) can be seen as a hybrid of EP and BM ratios. The purpose of this study is to examine whether portfolios created by utilizing the EVAM ratio will generate higher returns than portfolios formed with EP or BM ratios.

Design/methodology/approach

Utilizing the EVA data obtained from Stern Stewart & Co. and financial data from COMPUSTAT and center for research in security prices (CRSP), portfolios are created following the Fama and French portfolio formation methodology. The authors form separate portfolios using EP, BM or EVAM ratios where firms are ranked by a ratio in year t, then split into deciles. Then portfolios are constructed in year t + 1 for each decile and equally weighted portfolio returns are calculated. The cumulative ten‐year returns are compared between portfolios formed with EP, BM and EVAM ratios.

Findings

There are three interesting findings. One, the EP portfolios depict results that have long been documented. That is, value stock (low price‐to‐earnings ratio firms) and growth stocks (high price‐to‐earnings ratio) exhibit the highest returns. Two, the ten BM portfolio performances are not statistically different. Three, the EVAM ratios indicate that the negative EVAM (lowest decile) portfolio exhibit the highest return and the second highest return is generated by the highest EVAM portfolio. The general results of the thirty portfolios show that the highest EVAM ratio (EVAM10) performs the best. However, the pairwise mean differences between EP, BM and EVAM portfolios do not show statistical differences over the 1995–2004 period.

Originality/value

Although investment strategies using EP ratio and BM ratio have been thoroughly studied, investment strategy using EVAM ratio has not. Given that it has been documented that EVA is a better conceptual measure of value, portfolio managers or investors would be interested to know whether utilizing EVA for investment strategy would earn a higher return than strategies that use EP or BM ratios.

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Review of Accounting and Finance, vol. 8 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 18 January 2011

Stoyu I. Ivanov and Janis K. Zaima

The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the…

Abstract

Purpose

The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of ESOP and the company cost of capital.

Design/methodology/approach

The capital asset pricing model is used to estimate the company's cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost of capital changes after the adoption of ESOP.

Findings

Results from the univariate analysis show that firms adopting leveraged as well as non‐leveraged ESOP plans experience decreases in costs of equity and debt capital as well as decreases in their WACC. However, the multivariate analysis demonstrates that only the non‐leveraged common ESOPs are negatively correlated to cost of equity, cost of debt, and WACC. Robustness tests confirm that the reduction in the cost of equity capital drives the decline in WACC.

Originality/value

The findings contribute to the cost of capital literature and have implications for firms that decide to engage in ESOP plans. It is found that ESOPs benefit from decreased cost of capital related to the ability to increase debt capacity for the firm as well as the existing tax preferential treatments of ESOP plans.

Details

Managerial Finance, vol. 37 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 19 September 2019

Jang Hyung Cho, Robert Daigler, YoungHa Ki and Janis Zaima

The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.

Abstract

Purpose

The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.

Design/methodology/approach

The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility.

Findings

Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders.

Originality/value

This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

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Review of Accounting and Finance, vol. 19 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 5 June 2009

Maretno Harjoto, Janis Zaima and Jian Zhang

The purpose of this paper is to investigate the size effect of market reaction to unexpected earnings based on whispers or unofficial individual earnings forecasts.

Abstract

Purpose

The purpose of this paper is to investigate the size effect of market reaction to unexpected earnings based on whispers or unofficial individual earnings forecasts.

Design/methodology/approach

Using both univariate and multiple regression analysis, this paper attempts to demonstrate that there is a size effect in the market reaction to unexpected earnings based on whispers. The empirical results are based on 13,795 quarterly earnings whispers over 1997‐2006.

Findings

The results show that for both abnormal returns (ARs) and trading volume, the market reaction for big firms is less compared to that of small firms.

Originality/value

Given that information for small firms is less available and transparent than for big firms, this paper provides useful evidence that whispers play a larger role in equity pricing for small firms.

Details

Managerial Finance, vol. 35 no. 7
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 August 1999

Steven H. Appelbaum, Dawn Henson and Kerry Knee

Examines varied empirical studies on downsizing which have revealed that, as a result of its aftermath, high percentages of companies have judged these efforts as…

Abstract

Examines varied empirical studies on downsizing which have revealed that, as a result of its aftermath, high percentages of companies have judged these efforts as unsuccessful. Corporate restructuring encompasses multiple forms of change, which are classified into three distinct categories: portfolio, financial and organizational. An analysis of the Freeman and Cameron theoretical framework on downsizing implementation processes is examined in terms of where the process occurs, during periods either of convergence and/or of reorientation, and the results associated with each approach. A case study of the Kansas Department of Health and Environment revealed that restructuring did not provide visible improvements in efficiency, economy and responsiveness. Cultural impact of this intervention revealed negative intergroup reactions, i.e. denial, dissatisfaction. An analysis of Richard Johnson’s model of the antecedents, processes and outcomes of downsizing revealed the impact upon strategy, productivity, human resources and finance. Interrelationships suggested diminished performances of firms which downsized without a lucid blueprint, adversely impacting upon these businesses. Finally, 30 recommendations are given for the human resource executive for effective downsizing, focusing upon: approach, involvement, leadership, communication, preparation, support, cost cutting, measurement, and implementation.

Details

Management Decision, vol. 37 no. 6
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 8 May 2017

Panagiotis Mazis and Andrianos Tsekrekos

The purpose of this paper is to analyze the content of the statements that are released by the Federal Open Market Committee (FOMC) after its meetings, identify the main…

Abstract

Purpose

The purpose of this paper is to analyze the content of the statements that are released by the Federal Open Market Committee (FOMC) after its meetings, identify the main textual associative patterns in the statements and examine their impact on the US treasury market.

Design/methodology/approach

Latent semantic analysis (LSA), a language processing technique that allows recognition of the textual associative patterns in documents, is applied to all the statements released by the FOMC between 2003 and 2014, so as to identify the main textual “themes” used by the Committee in its communication to the public. The importance of the main identified “themes” is tracked over time, before examining their (collective and individual) effect on treasury market yield volatility via time-series regression analysis.

Findings

We find that FOMC statements incorporate multiple, multifaceted and recurring textual themes, with six of them being able to characterize most of the communicated monetary policy in the authors’ sample period. The themes are statistically significant in explaining the variation in three-month, two-year, five-year and ten-year treasury yields, even after controlling for monetary policy uncertainty and the concurrent economic outlook.

Research limitations/implications

The main research implication of the authors’ study is that the LSA can successfully identify the most economically significant themes underlying the Fed’s communication, as the latter is expressed in monetary policy statements. The authors feel that the findings of the study would be strengthened if the analysis was repeated using intra-day (tick-by-tick or five-minute) data on treasury yields.

Social implications

The authors’ findings are consistent with the notion that the move to “increased transparency” by the Fed is important and meaningful for financial and capital markets, as suggested by the significant effect that the most important identified textual themes have on treasury yield volatility.

Originality/value

This paper makes a timely contribution to a fairly recent stream of research that combines specific textual and statistical techniques so as to conduct content analysis. To the best of their knowledge, the authors’ study is the first that applies the LSA to the statements released by the FOMC.

Details

Review of Accounting and Finance, vol. 16 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 5 August 2014

Anthony J. Amoruso and Joseph D. Beams

– This paper aims to test the effects that different compensation policies have on managerial discretion with regard to stock options.

Abstract

Purpose

This paper aims to test the effects that different compensation policies have on managerial discretion with regard to stock options.

Design/methodology/approach

Hand-collected data from Securities and Exchange Commission registration statements are used to analyze the effects of chief executive officer (CEO) compensation policies on managerial discretion used in valuing stock options.

Findings

This paper provides evidence that during the height of the initial public offering (IPO) bubble, CEO pay was associated with the undervaluation of stock options by IPO firms. The discretion varies with the relative mix of cash vs stock-based compensation. Firms with higher cash compensation tend to undervalue the unobservable market price of pre-IPO shares, leading to lower option values and a lower likelihood of reporting in-the-money options. Firms with greater stock-based compensation understate stock volatility, resulting in lower measures of the time-value component of options.

Practical implications

The results provide evidence that firms attempted to disguise the true value of CEO pay when making IPOs. By disguising the value of options granted to the CEO, outsiders were not aware of the actual cost incurred and the true value of the company.

Originality/value

This paper is the first to document that IPO firms understate the non-observable market price of pre-IPO shares to manipulate the value of stock options. It also documents the effect of discretion in estimates of volatility on stock options and the link between this discretion and CEO compensation.

Details

Review of Accounting and Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 5 August 2014

Shreesh Deshpande and Vijay Jog

This study aims to examine a large, non-disclosed production contract awarded to Lockheed Corp. in the context of a trade-off between a contractually required…

Abstract

Purpose

This study aims to examine a large, non-disclosed production contract awarded to Lockheed Corp. in the context of a trade-off between a contractually required non-disclosure clause and the need (as a publicly traded firm) to disclose material information to its shareholders. This production contract generated significant cash flows to the firm as evidenced by growth in its earnings. However, the existence of the production contract and its contribution to Lockheed’s earnings, was not disclosed by the firm to shareholders and potential investors while the production contract was being executed.

Design/methodology/approach

The authors examine the market reaction to several key contract events which were not disclosed at the time they occurred, in compliance with the contractually required non-disclosure clause.

Findings

A statistically significant stock price reaction around the time of the award of this non-public contract, indicative of trading by some capital market participants using non-public information was documented.

Originality/value

Because similar large non-public contracts funded by the government are common in the industrial economy, we conclude by discussing implications for organizational structure, firm’s cost of capital, equity-based compensation and market efficiency.

Details

Review of Accounting and Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 8 August 2016

Ranjan Kumar Mitra

This paper aims to examine the association between earnings quality and firm-specific return volatility for a large sample of Japanese manufacturing firms.

Abstract

Purpose

This paper aims to examine the association between earnings quality and firm-specific return volatility for a large sample of Japanese manufacturing firms.

Design/methodology/approach

This archival research uses idiosyncratic volatility and asynchronicity as two analogous proxies for firm-specific return volatility to investigate its association with earnings quality.

Findings

Using idiosyncratic volatility and asynchronicity as two comparable proxies for firm-specific return volatility, the author finds contradictory results. The author relates this contradiction to another debate in accounting and finance literature about whether firm-specific return volatility captures firm-specific information or noise. Initially, the author obtains conflicting results because the systematic risk, one of the components of asynchronicity, is highly correlated with earnings quality. After controlling for the systematic risk, the author finds that higher earnings quality is associated with lower firm-specific return volatility. This finding is consistent with the noise-based explanation of firm-specific return volatility. The author also separates earnings quality into an innate component driven by economic fundamentals and a discretionary component driven by managerial discretionary behavior and finds that both components have significant impact on firm-specific return volatility but the innate component has significantly stronger effect than the discretionary component.

Originality/value

This is the first research study presenting evidence on the association between earnings quality and firm-specific return volatility in the Japanese setting. The findings of this paper are likely to contribute to the resolution of a well-known debate on whether firm-specific return volatility captures more firm-specific information being impounded in stock prices or noise in stock prices.

Details

Review of Accounting and Finance, vol. 15 no. 3
Type: Research Article
ISSN: 1475-7702

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