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Article
Publication date: 3 August 2012

A note on US institutional equity flows to Brazil

Joseph J. French and Wei‐Xuan Li

The purpose of this research is to understand the long‐run dynamics between returns, commodity prices, volatility, and US equity investment into Brazil. This research is…

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Abstract

Purpose

The purpose of this research is to understand the long‐run dynamics between returns, commodity prices, volatility, and US equity investment into Brazil. This research is prompted by the rapid increase in foreign equity investment into Brazil.

Design/methodology/approach

To address long‐run dynamic nature of the variables, multivariate autoregressive model is fitted for the period of January 1998 to May 2008. To achieve identification of this model, restrictions are imposed based on underlying financial theory and the nature of the data.

Findings

The paper finds consistent with a long literature, that US institutional equity investment is forecasted by past returns on the Brazilian stock index (BOVESPA). The paper also documents the important role of commodity prices in forecasting US equity flows to Brazil, a variable that has not been considered in much of existing literature. Finally, the paper uncovers a strong relationship between US equity flows to Brazil and measures of risk. The paper documents that an unexpected shock to US equity flows increases the volatility of the Brazilian equity market beyond what could be predicted by other variables in the system. The strong joint dynamics among US portfolio equity flows and the risk and return of the Brazilian equity market demonstrates the need for policy makers in Brazil to monitor short‐term portfolio flows.

Originality/value

There is a broad literature on the dynamics of US investment in emerging and developed markets but very little work focuses directly on Brazil. Additionally, this work is one of the first to explicitly consider the role of commodity prices on the dynamics of foreign equity flows to resource rich nations.

Details

Review of Accounting and Finance, vol. 11 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/14757701211252609
ISSN: 1475-7702

Keywords

  • Brazil
  • Portfolio equity flows
  • Commodities
  • SVARX
  • Equity capital
  • United States of America

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Article
Publication date: 1 February 1993

An Introduction to Financial Management

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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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.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/00251749310031851
ISSN: 0025-1747

Keywords

  • Cash flow
  • Financial management
  • Financial statements
  • Managers
  • Profit forecasting
  • Ratios
  • Standard costing
  • Students

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Article
Publication date: 29 April 2014

Liquidity and real estate asset pricing: a pan-European study

Alexander Scholz, Stephan Lang and Wolfgang Schaefers

Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real…

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Abstract

Purpose

Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate equity returns, after accounting for well-documented systematic risk factors.

Design/methodology/approach

Based on risk factors derived from general equity data, the authors extend the Fama-French time-series regression approach by a liquidity factor, using a pan-European sample of 272 real estate equities.

Findings

The empirical results indicate that liquidity is a significant pricing factor in real estate stock returns, even after controlling for market, size and book-to-market factors. In addition, the authors detect that real estate stock returns load predominantly positively on the liquidity risk factor, suggesting that real estate equities tend to behave like illiquid common equities. These findings are underpinned by a series of robustness checks. Running a comparative analysis with alternative factor models, the authors further demonstrate that the liquidity-augmented asset-pricing model is most appropriate for explaining European real estate stock returns.

Research limitations/implications

The inclusion of sentiment and downside risk factors could provide further insights into real estate asset pricing in European capital markets.

Originality/value

This is the first study to examine the role of liquidity as a systematic risk factor in a pan-European setting.

Details

Journal of European Real Estate Research, vol. 7 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/JERER-06-2013-0009
ISSN: 1753-9269

Keywords

  • Liquidity
  • Asset pricing
  • European real estate equities
  • Factor model
  • Fama-French
  • Pan-European study

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Article
Publication date: 14 January 2021

The complex relationship between inflation and equity returns

Jinan Liu and Apostolos Serletis

To investigate the complex relationship between inflation, inflation uncertainty and equity returns.

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Abstract

Purpose

To investigate the complex relationship between inflation, inflation uncertainty and equity returns.

Design/methodology/approach

This paper uses a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model to investigate the relationship between inflation, inflation uncertainty and equity returns.

Findings

Using monthly inflation and equity returns data for the G7 and EM7 economies, we find that the effects of inflation and inflation uncertainty on equity returns vary across countries.

Research limitations/implications

The mixed evidence we find potentially reflects the changing dynamics, policy regimes, economic shocks and country-specific factors (such as differences in the financing patterns of enterprises and the legal and financial environments) across the G7 and EM7 countries.

Practical implications

We contribute to the empirical literature in the following ways. First, we rely on a wide sample of countries, including both developed and emerging economies. Second, we extend previous research by estimating a GARCH-in-mean model of monthly equity returns in which both realized returns and their conditional volatility are allowed to vary with inflation. Previous articles that studied the relationship between inflation and stock market returns generally sought time-invariant effects of inflation on stock returns.

Social implications

The paper helps to reconcile the divergent results of previous empirical studies and distinguish between alternative explanations of the relationship between inflation and equity returns.

Originality/value

Our study provides an improved comprehension of the ambiguous relationship between inflation, inflation uncertainty and equity returns under various central bank mandates and different levels of central bank independence. The mixed empirical evidence across countries we present provides insights for the macroeconomic models that consider the relationship between uncertainty and macroeconomic performance as a fundamental building block. Therefore, our empirical study calls for further work on the relationship between inflation, inflation uncertainty and equity returns.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
DOI: https://doi.org/10.1108/JES-10-2020-0526
ISSN: 0144-3585

Keywords

  • Inflation uncertainty
  • Equity returns
  • Bivariate VARMA
  • GARCH-in-mean model
  • C22
  • E31
  • G12

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Book part
Publication date: 5 February 2019

Market Level Influences and Transaction Timing

Les Coleman

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Details

New Principles of Equity Investment
Type: Book
DOI: https://doi.org/10.1108/978-1-78973-063-020191008
ISBN: 978-1-78973-063-0

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Article
Publication date: 2 October 2017

Valuation of the worldwide commodities sector: The role of market-to-book and return on equity

Marcelo Bianconi and Joe Akira Yoshino

This paper aims to empirically investigate the market-to-book/return on equity valuation model.

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Abstract

Purpose

This paper aims to empirically investigate the market-to-book/return on equity valuation model.

Design/methodology/approach

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.

Findings

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.

Practical implications

The commodities sector is important for countries that depend on it for development.

Originality/value

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.

Details

Studies in Economics and Finance, vol. 34 no. 4
Type: Research Article
DOI: https://doi.org/10.1108/SEF-04-2016-0095
ISSN: 1086-7376

Keywords

  • Quantile regression
  • Valuation model
  • IV

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Article
Publication date: 29 April 2014

Idiosyncratic risk and the cross-section of European real estate equity returns

Kai-Magnus Schulte

This study is the first to examine the role of idiosyncratic risk in the pricing of European real estate equities. The capital asset pricing model predicts that in…

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Abstract

Purpose

This study is the first to examine the role of idiosyncratic risk in the pricing of European real estate equities. The capital asset pricing model predicts that in equilibrium, investors should hold the market portfolio. As a result, investors should only be rewarded for carrying undiversifiable systematic risk and not for diversifiable idiosyncratic risk. The study is adding to the growing body of countering studies by first examining time trends of idiosyncratic risk and subsequently the pricing of idiosyncratic risk in European real estate equities. The paper aims to discuss these issues.

Design/methodology/approach

The study analyses 293 real estate equities from 16 European capital markets over the 1991-2011 period. The framework of Fama and MacBeth is employed. Regressions of the cross-section of expected equity excess returns on idiosyncratic risk and other firm characteristics such as beta, size, book-to-market equity (BE/ME), momentum, liquidity and co-skewness are performed. Due to recent evidence on the conditional pricing of European real estate equities, the pricing is also investigated using the conditional framework of Pettengill et al. Either realised or expected idiosyncratic volatility forecasted using a set of exponential generalized autoregressive conditional heteroskedasticity models are employed.

Findings

The initial analysis of time trends in idiosyncratic risk reveals that while the early 1990s are characterised by both high total and idiosyncratic volatility, a strong downward trend emerged in 1992 which was only interrupted by the burst of the dotcom bubble and the 9/11 attacks along with the global financial and economic crisis. The largest part of total volatility is idiosyncratic and therefore firm-specific in nature. Simple cross-correlations indicate that high beta, small size, high BE/ME, low momentum, low liquidity and high co-skewness equities have higher idiosyncratic risk. While size and BE/ME are priced unconditionally from 1991 to 2011, both measures of idiosyncratic risk fail to achieve significance at reasonable levels. However, once conditioned on the general equity market or real estate equity market, a strong positive relationship between idiosyncratic risk and expected returns emerges in up-markets, while the opposite relationship exists in down-markets. The relationship is robust to firm-specific factors and a series of robustness checks.

Research limitations/implications

The results show that ignoring the conditional relationship between idiosyncratic risk and returns might result in the false realisation that idiosyncratic risk does not matter in the pricing of risky (real estate) assets.

Originality/value

This study is the first to examine the role of idiosyncratic risk in the pricing of European real estate equities. The study reveals differences in the pricing of European real estate equities and US REITs. The study highlights that ignoring the conditional relationship between idiosyncratic risk and returns might result in the false realisation that idiosyncratic risk does not matter in the pricing of risky assets.

Details

Journal of European Real Estate Research, vol. 7 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/JERER-03-2013-0003
ISSN: 1753-9269

Keywords

  • Pricing
  • Europe
  • Cross-section
  • Idiosyncratic risk
  • Idiosyncratic volatility
  • Real estate equities

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Article
Publication date: 25 October 2011

Systematic risk factors in European real estate equities

Kai‐Magnus Schulte, Tobias Dechant and Wolfgang Schaefers

The purpose of this paper is to investigate the pricing of European real estate equities. The study examines the main drivers of real estate equity returns and determines…

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Abstract

Purpose

The purpose of this paper is to investigate the pricing of European real estate equities. The study examines the main drivers of real estate equity returns and determines whether loadings on systematic risk factors – the excess market return, small minus big (SMB), HIGH minus low (HML) – can explain cross‐sectional return differences in unconditional as well as in conditional asset pricing tests.

Design/methodology/approach

The paper draws upon time‐series regressions to investigate determinants of real estate equity returns. Rolling Fama‐French regressions are applied to estimate time‐varying loadings on systematic risk factors. Unconditional as well as conditional monthly Fama‐MacBeth regressions are employed to explain cross‐sectional return variations.

Findings

Systematic risk factors are important drivers of European real estate equity returns. Returns are positively related to the excess market return and to a value factor. A size factor impacts predominantly negatively on real estate returns. The results indicate increasing market integration after the introduction of the Euro. Loadings on systematic risk factors have weak explanatory power in unconditional cross‐section regressions but can explain returns in a conditional framework. Beta – and to a lesser extent the loading on HML – is positively related to returns in up‐markets and negatively in down markets. Equities which load positively on SMB outperform in down markets.

Research limitations/implications

The implementation of a liquidity or a momentum factor could provide further evidence on the pricing of European real estate equities.

Practical implications

The findings could help investors to manage the risk exposure more effectively. Investors should furthermore be able to estimate their cost of equity more precisely and might better be able to pick stocks for time varying investment strategies.

Originality/value

This is the first paper to examine the pricing of real estate equity returns in a pan‐European setting.

Details

Journal of European Real Estate Research, vol. 4 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/17539261111183416
ISSN: 1753-9269

Keywords

  • European real estate
  • Equity capital
  • Returns
  • Risk factors
  • Conditional asset pricing
  • Pan‐European
  • Fama‐French
  • Fama‐MacBeth

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Article
Publication date: 6 July 2015

An equity management and planning tool for cooperatives

Jeffrey Royer

The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio…

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Abstract

Purpose

The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio (TIER). The objectives of the paper are to construct a mathematical model that provides a rigorous foundation for the TIER approach, modify the approach so the rate of return on equity is a function of the cooperative’s equity position, demonstrate how elements of the model can be used by RECs in setting electric rates that will enable them to accelerate the retirement of member equity, and derive a generalized form of the “modified Goodwin formula” that can be used by both RECs and agricultural cooperatives.

Design/methodology/approach

Mathematical and graphical expressions of the TIER approach are developed. Simulations are used to demonstrate how RECs can set electric rates according to a target revolving period. The modified Goodwin formula is generalized to include the payment of cash patronage refunds through use of a growth model of an agricultural cooperative developed in Royer (1993).

Findings

This paper demonstrates how TIER analysis and the modified Goodwin formula can be used by cooperatives to aid their decisions regarding debt and equity financing and their choices regarding cash patronage refunds, equity retirement, and growth. The paper demonstrates that cooperatives that fail to recognize the functional relationship between the rate of return on equity and the equity position may substantially underestimate the equity position necessary to meet interest coverage requirements and overestimate their ability to grow and retire equity. It also shows that RECs may be able to make substantial improvements in equity revolvement with only modest increases in electric rates.

Research limitations/implications

The model developed in this paper has been simplified to focus on fundamental financial relationships. To apply this model, cooperatives may need to modify it to accommodate the complexities of their business operations.

Practical implications

TIER analysis can provide a useful equity management and planning tool for both RECs and agricultural cooperatives. It also can be used by lending institutions to assess the financial health of individual cooperative organizations.

Originality/value

Constructing a mathematical model that provides a foundation for TIER analysis, modifying the approach so that the rate of return on equity is a function of the equity position, demonstrating how RECs can use the model to set electric rates according to a target revolving period, and generalizing the modified Goodwin formula so it can be used by agricultural cooperatives are all original contributions.

Details

Agricultural Finance Review, vol. 75 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/AFR-03-2014-0004
ISSN: 0002-1466

Keywords

  • Agricultural cooperatives
  • Capitalization
  • Equity financing
  • Equity retirement
  • Ratio analysis
  • Rural electric cooperatives

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Article
Publication date: 21 April 2011

The Expected Cost of Equity and the Expected Risk Premium in the UK

Alan Gregory

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given…

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Abstract

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.

Details

Review of Behavioural Finance, vol. 3 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/19405979201100001
ISSN: 1940-5979

Keywords

  • Cost of equity
  • Market risk premium

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