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Article
Publication date: 29 June 2021

Emre Çelik and Kerem Yavuz Arslanli

This paper aims to determine the specific financial ratio's effects on market value and return of assets for Turkish real estate investment trusts (REITs) traded at…

Abstract

Purpose

This paper aims to determine the specific financial ratio's effects on market value and return of assets for Turkish real estate investment trusts (REITs) traded at Istanbul Stock Exchange (ISE). The paper intends to define liquidity ratios, financial structure ratios, return ratios and stock performance ratios related to market value and return of asset.

Design/methodology/approach

The study includes 17 REITs traded in ISE. The period of study is specified as the year from 2009 to 2018. Panel data analysis is applied in this study. Dependent variables are current market value and return of assets, independent variables are 12 financial ratios, which are considered to explain the model significantly. These ratios will be calculated from audited year-end balance sheets for specific periods throughout at least ten years as time series. Two different models and hypotheses have been established to identify the financial ratios that affect the market value and return of assets for REITs.

Findings

According to the results, long-term financial loans/total assets, return of equity and working capital ratio are negatively correlated with market value, while market value/book value and total assets are correlated positively. On the other hand, market value/book value ratio, price/earning ratio, long-term financial loans/total assets and earnings per share are correlated with return of assets. REITs have high levels of financial leverage, especially in foreign currency. The striking point is that REITs hardly ever do not use financial derivatives to hedge their position again currency and interest rate risk. This approach makes the financial structures of REITs vulnerable and fragile against market volatility.

Originality/value

In Turkey, as an example of an emerging market, financial borrowing does not increase the return rates and market value for REITs due to market's idiosyncratic properties. This finding provides substantial insight into how the debt and equity allocation of Turkish REITs should be structured. Also, it has been observed that forward-looking expectations are considered more than the current situation in the market.

Details

Journal of European Real Estate Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1753-9269

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Article
Publication date: 10 August 2010

Marc Schauten, Rudolf Stegink and Gijs de Graaff

The purpose of this paper is to determine the required return of intangible assets for eight different business sectors by means of an empirical study of companies from…

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Abstract

Purpose

The purpose of this paper is to determine the required return of intangible assets for eight different business sectors by means of an empirical study of companies from the US Standard & Poor's 500 index. The resulting required return is subsequently compared with proxies for the required return on intangible assets used in practice, such as the weighted average cost of capital (WACC).

Design/methodology/approach

To determine the discount rate of the intangible assets the paper applies the weighted average return on assets method (weighted average return on assets (WARA) method). The paper finds the return on intangible assets (RIA) by setting the WARA equal to the WACC and solves the equation for RIA.

Findings

For all the identified sectors, the RIA is higher than the WACC. It is also shown that this return is higher than the levered or unlevered cost of equity of the company as a whole. In six of the eight sectors, the levered cost of equity appears to be the best proxy for the required return on intangible assets.

Practical implications

The paper shows how the required return on intangible assets can be estimated. The required return is needed for discounted cash flow valuations of intangible assets.

Originality/value

This paper adjusts the WARA method applied by Smith and Parr. In contrast to Smith and Parr, the tax shield is included as a separate asset in the model. Consequently, the WACC before tax is used instead of the WACC after tax.

Details

Managerial Finance, vol. 36 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 28 October 2002

Gale E. Newell, Jerry G. Kreuze and David Hurtt

With the bankruptcy of Enron and the accompanying loss of pension benefits of its employees, pensions have recently received significant press. Accounting for pension plan…

Abstract

With the bankruptcy of Enron and the accompanying loss of pension benefits of its employees, pensions have recently received significant press. Accounting for pension plan obligations, for defined benefit plans in particular, requires companies to make assumptions regarding discount rates, projected salary increases, and expected long‐term return on plan assets. Such assumptions, in turn, determine the funding status of the pension plan and the annual pension expense. Higher assumed discount rates reduce the pension obligation, enhance the funding status of the plan, and reduce any lump‐sum payments. Higher expected return on assets reduces the current pension expense. This study investigates the relationship between pension plan assumptions and the funding status of a pension plan. The results reveal that companies with pension plans that are more fully funded assume higher discount rates and expected long‐term return on assets than do companies with less funded plans. The effect of these assumptions is that higher discount rate assumptions lead to better funding status, and higher expected long‐term rates of return on assets partially offset the pension expense impacts of these higher discount rate assumptions. We are doubtful that more funded plans collectively should be assuming higher discount rates and expected long‐term return on plan assets, especially since the actual return on plan assets investigated did not correlate with these assumptions.

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American Journal of Business, vol. 17 no. 2
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

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Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

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Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

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Book part
Publication date: 27 August 2014

James S. Ang and Gregory L. Nagel

Our chapter raises serious questions about the long-term efficiency of stock prices in relation to the realized returns of the underlying corporate real assets. In our…

Abstract

Our chapter raises serious questions about the long-term efficiency of stock prices in relation to the realized returns of the underlying corporate real assets. In our large-scale calculations that cover horizons of 10, 20, 30, 40, and 50 years, returns on corporate real assets suffer a long-term decline, and have been below the yields of 10-year Treasury bonds since 1973. Real assets that received more external financing from capital markets and institutions actually report even lower realized long-term returns. The decline in realized returns cannot be attributed to declining risks as the volatilities of realized returns have been increasing over time. These surprising results may stimulate fresh debate on the roles and long-term performance of capital markets and institutions.

Details

Research in Finance
Type: Book
ISBN: 978-1-78190-759-7

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Book part
Publication date: 4 April 2005

Mirko Cardinale

The paper uses 101 years of Chilean and international financial assets returns to investigate mean-variance optimal portfolio allocations. The key conclusion is that the…

Abstract

The paper uses 101 years of Chilean and international financial assets returns to investigate mean-variance optimal portfolio allocations. The key conclusion is that the share of international unhedged investments is substantial even in minimum risk portfolios (20%), unless the period 1980–2002 is assumed to be drawn from a different distribution and previous history is disregarded. In addition to that, the paper finds that mean-variance optimal investors would have generated substantial demand for an asset replicating the return profile of an efficient pay-as-you-go pension scheme. Labour income and departures from log-normality of returns might, however, affect the latter conclusion.

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Latin American Financial Markets: Developments in Financial Innovations
Type: Book
ISBN: 978-1-84950-315-0

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Article
Publication date: 24 October 2018

Rahul Verma and Priti Verma

The purpose of this paper is to investigate the existence of behavioral biases, disposition effect and house money effect in investment decisions of defined benefit…

Abstract

Purpose

The purpose of this paper is to investigate the existence of behavioral biases, disposition effect and house money effect in investment decisions of defined benefit pension funds. It investigates the determinants of portfolios by examining whether pensions display risk seeking or risk aversion behavior in reaction to prior gains and losses.

Design/methodology/approach

The first research question is to examine the impact of prior period’s return and αs on existing portfolio allocation in equity, debt, real estate and other assets. In order to test this relationship, four separate regressions are estimated using the pooled data. Regression helps in examining the relationship between prior gains with current allocation in four categories of assets of varying degrees of riskiness (stocks, debt, real estate and other assets). In order to investigate the second research question on whether pension funds increase (decrease) their investments in risky (safer) assets due to prior gains and αs, the four variables representing the changes in portfolio allocation for each asset class over one period are employed. These changes in allocation are regressed against the prior year’s actual return, expected return, αs and a set of control variables.

Findings

The results suggest significant negative (positive) relationship between prior positive returns and αs with portfolio allocation in risky (safer) assets. Also, there is an increased (decreased) investment in safer (risky) assets following prior period’s positive returns and αs. The findings confirm the existence of disposition effect, while there is no evidence of house money effect.

Originality/value

The portfolio allocation of pension plans provides unique setting to investigate the relevance of behavioral finance and examine the role of psychological biases on risk taking. This study attempts to contribute to the literature by empirically investigating whether the tenets of behavioral finance are relevant in defined benefit pension fund’s portfolio allocation decisions. Specifically, it focuses on the determinants of portfolio choices by directly investigating pension funds’ reaction to prior period’s actual as well as risk adjusted return (or αs – the difference between the actual and expected return).

Details

Review of Behavioral Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 28 June 2021

Yiyi Qin, Jun Cai and Steven Wei

In this paper, we aim to answer two questions. First, whether firms manipulate reported earnings via pension assumptions when facing mandatory contributions. Second…

Abstract

Purpose

In this paper, we aim to answer two questions. First, whether firms manipulate reported earnings via pension assumptions when facing mandatory contributions. Second, whether firms alter their earnings management behavior when the Financial Accounting Standard Board (FASB) mandates disclosure of pension asset composition and a description of investment strategy under SFAS 132R.

Design/methodology/approach

Our basic approach is to run linear regressions of firm-year assumed returns on the log of pension sensitivity measures, controlling for current and lagged actual returns from pension assets, fiscal year dummies and industry dummies. The larger the pension sensitivity ratios, the stronger the effects from inflated ERRs on reported earnings. We confirm the early results that the regression slopes are positive and highly significant. We construct an indicator variable DMC to capture the mandatory contributions firms face and another indicator variable D132R to capture the effect of SFAS 132R. DMC takes the value of one for fiscal years during which an acquisition takes place and zero otherwise. D132R takes the value of one for fiscal years after December 15, 2003 and zero otherwise.

Findings

Our sample covers the period from June 1992 to December 2017. Our key results are as follows. The estimated coefficient (t-statistic) on DMC is 0.308 (6.87). Firms facing mandatory contributions tend to set ERRs at an average 0.308% higher. The estimated coefficient (t-statistic) on D132R is −2.190 (−13.70). The new disclosure requirement under SFAS 132R constrains all firms to set ERRs at an average 2.190% lower. The estimate (t-statistic) on the interactive term DMA×D132R is −0.237 (−3.29). When mandatory contributions happen during the post-SFAS 132R period, firms tend to set ERRs at 0.237% lower than they would do otherwise in the pre-SFAS 132R period.

Originality/value

When firms face mandatory contributions, typically firm experience negative stock market returns. We examine whether managers manage earnings to mitigate such negative impact. We find that firms inflate assumed returns on pension assets to boost their reported earnings when facing mandatory contributions. We also find that managers alter earnings management behavior, in the case of mandatory contributions, following the introduction of new pension disclosure standards under SFAS 132R that become effective on December 15, 2003. Under the new SFAS 132R requirement, firms need to disclose asset allocation and describe investment strategies. This imposes restrictions on managers' discretion in making ERR assumptions, since now the composition of pension assets is a key determinant of the assumed expected rate of return on pension assets. Firms need to justify their ERRs with their asset allocations.

Details

China Finance Review International, vol. 11 no. 4
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 11 January 2022

Lehlohonolo Letho, Grieve Chelwa and Abdul Latif Alhassan

This paper examines the effect of cryptocurrencies on the portfolio risk-adjusted returns of traditional and alternative investments within an emerging market economy.

Abstract

Purpose

This paper examines the effect of cryptocurrencies on the portfolio risk-adjusted returns of traditional and alternative investments within an emerging market economy.

Design/methodology/approach

The paper employs daily arithmetic returns from August 2015 to October 2018 of traditional assets (stocks, bonds, currencies), alternative assets (commodities, real estate) and cryptocurrencies. Using the mean-variance analysis, the Sharpe ratio, the conditional value-at-risk and the mean-variance spanning tests.

Findings

The paper documents evidence to support the diversification benefits of cryptocurrencies by utilising the mean-variance tests, improving the efficient frontier and the risk-adjusted returns of the emerging market economy portfolio of investments.

Practical implications

This paper firmly broadens the Modern Portfolio Theory by authenticating cryptocurrencies as assets with diversification benefits in an emerging market economy investment portfolio.

Originality/value

As far as the authors are concerned, this paper presents the first evidence of the effect of diversification benefits of cryptocurrencies on emerging market asset portfolios constructed using traditional and alternative assets.

Details

China Finance Review International, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 8 January 2019

Krishna Prasad Pokharel, Madhav Regmi, Allen M. Featherstone and David W. Archer

The purpose of this paper is to identify financial stress and the causes of financial stress for agricultural cooperatives and provide management recommendations to…

Abstract

Purpose

The purpose of this paper is to identify financial stress and the causes of financial stress for agricultural cooperatives and provide management recommendations to stakeholders including cooperatives’ managers, boards of directors and lenders.

Design/methodology/approach

This research used the geometric mean of the real rate of return on equity to identify financially stressed agricultural cooperatives. The real rate of return on equity allows the allocation of total financial stress among the return on assets, leverage and interest rate issues.

Findings

This study found that financially non-stressed agricultural cooperatives had a higher rate of return on equity and rate of return on assets, but lower leverage ratios and interest rates than stressed agricultural cooperatives. Further, non-stressed cooperatives had higher total assets and sales compared to stressed cooperatives. This suggests that smaller cooperatives are more likely to face financial stress than larger cooperatives. The decomposition of the financial problem showed that a substantial percentage of financial stress was correlated with a low return on assets or profitability. A smaller percentage of financial stress was due to financing decisions.

Originality/value

This study provides value by measuring the impact of profitability, leverage and interest rate on the financial performance of agricultural cooperatives. Results showed that a substantial proportion of financial stress was associated with a low return on assets. This indicates that profitability is a problem for agricultural cooperatives. This study also examines profitability during a period of volatile returns in production agriculture.

Details

Agricultural Finance Review, vol. 79 no. 2
Type: Research Article
ISSN: 0002-1466

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