Search results

The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc manner in the absence of a methodology for more rigorous assessment of value. The application of real option methodology represents a more objective mechanism that allows managers to hedge against adverse effects and exploit upside potential. Of particular interest to managers in the merger and acquisition (M&A) process is the value of such flexibility related to the particular terms of a transaction. Typically, stock for stock transactions take more time to complete as compared to cash given the time lapse between announcement and completion. Over this period, if stock prices are volatile, stock for stock exchanges may result in adverse selection through the dilution of shareholder wealth of an acquiring firm or a target firm.

The paper develops a real option collar model that may be employed by managers to measure the market price risk involved to their shareholders in offering or accepting stock. We further discuss accounting issues related to this contingency pricing effect. Using an acquisition example from U.S. banking industry we illustrate how the collar arrangement may be used to hedge market price risk through flexibility to renegotiate the deal by exercising managerial options.

This paper asks whether market fundamentals can explain the run-up and collapse of Enron’s stock price and price-earnings ratio. We use a variant of the discounted cash flow model proposed by Miller and Modigliani (1961) to show that the growth rates implied by the stock’s valuation have rarely been achieved in recorded business history. We also provide evidence of earnings management by the company that may have contributed to extravagant investor expectations of earnings growth. Between 1990 and 2000 the firm’s reported earnings met or exceeded analysts’ earnings forecasts 77% of the time. Furthermore, beginning in 1997 Enron used asset sales (often to related parties) to generate as much as 83% of its annual earnings.

This chapter describes an in-class exercise to illustrate the implications associated with earnings management and corporate social responsibility (CSR). Student teams act as senior managers, evaluating scenarios in which they must decide whether to engage in earnings management and socially responsible actions. All decisions have the potential to change the firm's net operating income. The “auditor” reviews earnings management decisions based on accounting choices, imposing a penalty if the auditor disallows a decision. Earnings management decisions also affect the firm's earnings quality, operationalized through adjustments to the price–earnings (P/E) ratio. Several decisions affect the firm's social responsibility rating, which ultimately affects the P/E ratio (reflecting the long-term effects of CSR). The class discusses the implications of engaging in earnings management and practicing social responsibility, as well as the ethical issues associated with these decisions. Survey results indicate that this is an effective pedagogical tool, as students are highly engaged in the exercise. Data analysis also suggests that propensity to engage in accounting manipulations decreases over the course of the exercise.

This study investigates the efficiency of value relevance and faithful representation when stock market price derivates from its firm value to the investigated IT companies listed in FTSE Taiwan 50. The empirical investigation reveals one financial indicators: Return on equity (ROE) has explanatory ability among seven financial indicators, earnings per share (EPS), book value (BV), dividend yield (Div.), price–earnings ratio (P/E), ROE, return on assets (ROA), and return on operating asset (ROOA) to both sampled companies, United Microelectronics Corporation, UMC, (2303) and Taiwan Semiconductor Manufacturing Company Limited, TSMC, (2330). Furthermore, the empirical results indicate that the higher order moments, skewness and kurtosis, of price deviation do not provide a reliable prediction or explanatory power for stock price trends.

In this chapter we study the peer comparable approach used for the valuation of companies that went public on the Italian Nuovo Mercato. In Italy, IPO prospectuses often report the valuation methods used by investment banks. This allows us to analyze the accuracy of “real-world” valuation estimates. We show that underwriters rely on price-to-book and price-earnings multiples. The valuation estimates generated by these multiples are closest to offer prices. Conversely, when using enterprise value ratios comparable firms’ multiples are typically higher than those of the firms going public. We argue that underwriters have the possibility to select comparables that make their valuations look conservative.

Factor investment is booming in global asset management, especially environmental, social, and governance (ESG), dividend yield, and volatility factors. In this chapter, we use data from the US securities market from 2003 to 2019 to predict dividends and volatility factors through machine learning and historical data–based methods. After that, we utilize particle swarm optimization to construct the Markowitz portfolio with limits on the number of assets and weight restrictions. The empirical results show that that the prediction ability using XGBoost is superior to the historical factor investment method. Moreover, the investment performance of our portfolio with ESG, high-yield, and low-volatility factors outperforms baseline methods, especially the S&P 500 ETF.

Jost et al. (2003) theorizes and finds that business students, on an average, hold a positive fair market ideology (FMI), which suggests that they believe in the power of market forces to reward ethical corporate behavior and punish unethical behavior; accordingly, they tend to make an implicit association between a company's financial performance relative to the stock market and the company's ethics. We suggest that audit education in professional skepticism and ‘red flag’ analysis will mitigate this implicit bias when a company's relative market performance is unusually distant from a referent benchmark, such as an industry average. In a between-participants experiment involving 94 non-audit and 94 audit business students, we measure their FMI, and examine how they perceive the ethicality of a company's management based on the referent direction (above or below the industry average) and referent magnitude (relatively close to or distant from the industry average) of the company's relative market performance. The results suggest that both non-audit and audit students indeed hold a positive FMI, and they ascribe favorable ethical perceptions to company performance that is relatively close to the industry average, irrespective of referent direction. When company performance is relatively distant from the industry average, neither group of students makes the implicit link. Overall, the findings do not indicate that audit education differentially affects business students’ perceptions of corporate ethics when a company's relative stock market performance deviates considerably from a referent benchmark.

The ‘managed stock’ market in Taiwan is neglected by the authorities and general investors. In this paper, we explore the link between financial trait and stock price changes in this special market.

Overall, we analyze and discuss managerial implications for institutional investors, general investors and the authorities as well.