Search results
1 – 10 of over 15000Scott Fung, Hoje Jo and Shih‐Chuan Tsai
The purpose of this paper is to examine the ways in which stock market valuation and managerial incentives jointly affect merger and acquisition (M&A) decisions and post‐M&A…
Abstract
Purpose
The purpose of this paper is to examine the ways in which stock market valuation and managerial incentives jointly affect merger and acquisition (M&A) decisions and post‐M&A performance, and to provide new evidence on the agency implications where such acquisitions are driven by the stock market.
Design/methodology/approach
Utilizing all publicly‐traded US firms in the NYSE, AMEX and NASDAQ during the period from 1992 to 2005 (excluding financial and utility firms), obtained from COMPUSTAT, CRSP, I/B/E/S, and the M&A database provided by SDC Platinum, this paper adopts a two‐stage approach: the first stage, predicts the probability of an M&A based on the market valuation variables; the second stage, regresses the post‐M&A firm performance on the predicted probability of a merger or acquisition from the first stage and other control variables.
Findings
Market valuation has a significant influence on corporate acquisition decisions, particularly for those firms whose compensation packages include less managerial equity ownership, more executive stock options and no long‐term incentive plans, and in those firms where CEOs are serving on the board of directors. The value‐destroying acquisitions made by these types of managers are likely to be financed using the firms' stocks, executed with high premiums and undertaken during periods of high market valuation.
Originality/value
The main finding suggests that market‐driven acquisitions could be value destroying when managers engage in opportunistic acquisitions for reasons of self‐interest. Managerial myopia, overconfidence, misaligned incentives, empire‐building motives and poor corporate governance can all exacerbate the agency problem of market‐driven acquisitions.
Details
Keywords
Several tests have been conducted to determine which valuation model best fits stock price data. Given very little success, those studies suggest the need for a clear…
Abstract
Several tests have been conducted to determine which valuation model best fits stock price data. Given very little success, those studies suggest the need for a clear understanding of the market process of stock price determination. This paper advances the concepts of product costing and product pricing, which pertain to financial accounting valuation and the stock market price determination, respectively. This research effort presents a workable hypothesis of stock price determination.
William R. Cron and Randall B. Hayes
Recent developments in accounting for stock options have increased interest in the analytical techniques used to value them. Techniques used to value the options of publicly…
Abstract
Recent developments in accounting for stock options have increased interest in the analytical techniques used to value them. Techniques used to value the options of publicly traded companies have been extensively discussed. In contrast, there has been almost no discussion of the valuation procedures of the options for non‐publicly traded companies. This paper addresses this gap. The paper suggests that a straightforward income capitalization model can be used to develop reasonable surrogates for the variables of the Black‐Scholes option pricing model. The paper also discusses how to adjust the income apitalization model for both lack of marketability and lack of control discounts.
Details
Keywords
The fundamental change in accounting rules for equity-based compensation (EBC) instituted by SFAS 123, SFAS 123r, and IFRS 2 has allowed for new insights related to a variety of…
Abstract
The fundamental change in accounting rules for equity-based compensation (EBC) instituted by SFAS 123, SFAS 123r, and IFRS 2 has allowed for new insights related to a variety of research questions. This paper discusses the empirical evidence generated in the wake of the new regulation and categorizes it into two broad streams. The first stream encompasses research on the changed use of EBC and the incentives provided. The second stream addresses how firms account for EBC, including the underreporting phenomenon and how it was affected by the mandatory recognition of EBC expenses. I discuss where research delivers unanimous findings versus contradictory results. Using these insights, I make recommendations for further research opportunities in the area of EBC.
Details
Keywords
John A. Doukas and Wenjia Zhang
– The purpose of this paper is to test whether bank mergers are driven by equity overvaluation and management compensation incentives.
Abstract
Purpose
The purpose of this paper is to test whether bank mergers are driven by equity overvaluation and management compensation incentives.
Design/methodology/approach
To test whether equity mispricing drive bank mergers, the authors employ two alternative price-to-residual income valuation (P/V) measures for bidders and targets while the authors control for their growth prospects with the price-to-book (P/B) (two years before) ratio. The intrinsic value (V) is estimated using the three-period forecast horizon residual income model of Ohlson (1995) and perpetual residual income model that does not rely on analysts’ forecasts of future earnings prospects. The latter measure allows the authors to estimate V for a much larger sample of banks. The empirical analysis is supplemented with a standard event analysis and assessment of the long-term performance of bank mergers subsequent to the announcement date.
Findings
The evidence shows that bidders are overvalued relative to their targets, especially in equity offer deals. The authors also find that highly valued bidders: are more likely to use stock than cash; are willing to pay more relative to the target market price; are more likely to acquire private than public targets; earn lower announcement-period returns; fail to create synergy gains; experience long-term underperformance; and reward their top managers of with large compensation increases subsequent to mergers.
Originality/value
This study provides results consistent with the view that behavioral and managerial incentives play an important role in motivating bank mergers.
Details
Keywords
The primary objective of this research is to provide evidence that there are two distinct layers of investor sentiments that can affect asset valuation models. The first is…
Abstract
Purpose
The primary objective of this research is to provide evidence that there are two distinct layers of investor sentiments that can affect asset valuation models. The first is general market-wide sentiments, while the second is biased approaches toward specific assets.
Design/methodology/approach
To achieve the goal, the authors conducted a multi-step analysis of stock returns and constructed complex sentiment indices that reflect the optimism or pessimism of stock market participants. The authors used panel regression with fixed effects and a sample of the US stock market to improve the explanatory power of the three-factor models.
Findings
The analysis showed that both market-level and stock-level sentiments have significant contributions, although they are not equal. The impact of stock-level sentiments is more profound than market-level sentiments, suggesting that neglecting the stock-level sentiment proxies in asset valuation models may lead to severe deficiencies.
Originality/value
In contrast to previous studies, the authors propose that investor sentiments should be measured using a multi-level factor approach rather than a single-factor approach. The authors identified two distinct levels of investor sentiment: general market-wide sentiments and individual stock-specific sentiments.
Details
Keywords
One of the most important principles that accountants apply when determining trading profit is the matching of costs against related revenues—a principle that in practical terms…
Abstract
One of the most important principles that accountants apply when determining trading profit is the matching of costs against related revenues—a principle that in practical terms requires the identification of those costs incurred prior to and during the accounting period under review which have to be charged against the revenue brought into the profit and loss account and those which have to be carried forward as a charge against the revenues of future accounting periods. In the case of manufacturing and trading enterprises many of the problems associated with this matching process arise in relation to the valuation of stocks and work in progress. Expenditures incurred in bringing these stocks of raw materials, work in progress and finished goods to their present state at the balance sheet date, after taking into consideration the possibility of deterioration, pilferage, obsolescence and factors of a similar nature, are treated as a charge against the revenues of future accounting periods and are accordingly carried forward in the balance sheet under the classification of “current assets”. It is thus that the values ascribed to trading stocks become a key factor in determining the trading profit for the period. It is not surprising, therefore, that the methods of valuing stocks and work in progress should have formed the subject of one of the most significant of the Statements of Standard Accounting Practice that have been issued by the Accounting Standards Steering Committee under the sponsorship of the major accountancy bodies. Even less surprising is the strength of feeling that has been aroused by some of the views expressed by individuals and organisations in giving evidence to the ASSC and to the Sandilands Committee, which has also been considering the problems of stock valuation in relation to its inquiry into inflation accounting. In this article the finance director of Tate & Lyle Limited argues the case for the “base stock” method of stock valuation. Although this method has a limited range of applications and is not widely used, it has got valid arguments in its favour in certain circumstances—despite failing to find favour with the ASSC in its Statement of Standard Accounting Practice No. 9. He contends that for his company to use the “first in—first out” method that finds favour with many accountants as an “all purpose” basis, the outcome would be to produce trading results that bear little reality to the true position.
Financial markets’ integration and technological advances in equity trading may have reduced the potential benefits from listing a firm's shares on a foreign exchange…
Abstract
Purpose
Financial markets’ integration and technological advances in equity trading may have reduced the potential benefits from listing a firm's shares on a foreign exchange. Nevertheless, a significant number of firms continue to cross‐list every year. This paper examines the recent cross‐listing trends and reviews the literature on motives to cross‐list.
Design/methodology/approach
The literature review includes a summary of theoretical studies grouped into cross‐listing theories including market segmentation, liquidity, investor recognition, information disclosure, legal bonding, proximity preference and business strategy theories, and also includes a discussion of testable implications and empirical evidence for each of the above mentioned cross‐listing theories.
Findings
An extensive cross‐listing literature offers a number of theories on the motives to cross‐list that in most cases complement each other by encompassing different aspects of the complex cross‐listing behavior. Nevertheless, continuous market developments, such as significant regulatory and technological changes in the ways capital markets operate, raise new questions on why firms cross‐list and call for further research to continue.
Details
Keywords
Ken-Yien Leong, Mohamed Ariff, Zarei Alireza and M. Ishaq Bhatti
The objective of this paper is to investigate the validity of stock valuation theories and their forecasting ability by conducting an empirical study. It employs four most…
Abstract
Purpose
The objective of this paper is to investigate the validity of stock valuation theories and their forecasting ability by conducting an empirical study. It employs four most commonly used theories which are then tested using 19-year banking-firm market data. The usefulness of these models demonstrates with promising results.
Design/methodology/approach
This paper conducts a multi-country study using the multi-model testing approach to evaluate validity of theories and forecast accuracy of banking firms. It employs four methodology models used in finance literature; (1) P/E multiples model, (2) accounting-information-based clean surplus model, (3) theoretical model based on Gordon and Shapiro (1956) method and (4) the Damodaran-Kottler Free Cash Flow or FCF theory based on discounting model.
Findings
The tests show that the four theories under tests have a significant fit with actual price formation. The explained variation ranges from 72 to 92%, so the explanatory power of the theories accounting for variations in bank prices over 19-year period is substantial. The models fit suggest that the P/E model has superior predictive power followed by the RIM, DDM and FCFE. These findings shed new lights on the relative performance of valuation models.
Research limitations/implications
The study is limited in terms of the sample period size for 1999–2019. The availability of essential financial data prior to 2000 is very limited, so one can understand interpretation of statistical results under certain assumptions.
Practical implications
The paper suggests that one-factor model is better than the two-factor model.
Originality/value
The work done in this paper is unpublished and original contribution to banking and finance literature and also not under consideration for publication in any other journal.
Details
Keywords
The purpose of this paper is to survey the accounting concepts of valuation and the direction of accounting research in terms of development of valuation models. It also simulates…
Abstract
Purpose
The purpose of this paper is to survey the accounting concepts of valuation and the direction of accounting research in terms of development of valuation models. It also simulates some of the models. Moreover, the Dividend Discount Model, a financial model, is the foundation of a number of accounting based models and is discussed.
Design/methodology/approach
The objectives are achieved by surveying the literature for accounting models and empirical evidence for the model. The methodology also incorporates simulating the models under different conditions to find out the valuation predicted.
Findings
It was found out that the accounting models predict that accrual principles play a role in increasing the discrepancy between the book value and the market value of equity. Some of the recent valuation models, like the Feltham–Ohlson linear information model, incorporate accrual principles like conservatism. Though the empirical evidences are mixed for these models, it provides a theoretical framework to incorporate accrual principles in the accounting valuation models.
Practical implications
This paper provides practitioners with a snapshot of different models and their limitations.
Originality/value
This paper provides a comprehensive picture of the state of accounting valuation models and provides input for further development of these models.
Details