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Article
Publication date: 1 October 2009

W.S. Nel

The question that inevitably surfaces in practice, and certainly in lecture halls, is which equity valuation method is superior. Popular opinion holds that academia and…

Abstract

The question that inevitably surfaces in practice, and certainly in lecture halls, is which equity valuation method is superior. Popular opinion holds that academia and investment practitioners may have different preferences in this regard. This article investigates which primary minority and majority equity valuation methods are advocated by academia, and how well these preferences are aligned with the equity valuation methods that investment practitioners apply in practice. The research results reveal that, contrary to popular belief, academia and practice are fairly well aligned in terms of preferred equity valuation methods, with notable differences in their respective approaches.

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Article
Publication date: 6 November 2017

Soon Nel and Niël le Roux

This paper aims to examine the valuation precision of composite models in each of six key industries in South Africa. The objective is to ascertain whether equity-based…

Abstract

Purpose

This paper aims to examine the valuation precision of composite models in each of six key industries in South Africa. The objective is to ascertain whether equity-based composite multiples models produce more accurate equity valuations than optimal equity-based, single-factor multiples models.

Design/methodology/approach

This study applied principal component regression and various mathematical optimisation methods to test the valuation precision of equity-based composite multiples models vis-à-vis equity-based, single-factor multiples models.

Findings

The findings confirmed that equity-based composite multiples models consistently produced valuations that were substantially more accurate than those of single-factor multiples models for the period between 2001 and 2010. The research results indicated that composite models produced up to 67 per cent more accurate valuations than single-factor multiples models for the period between 2001 and 2010, which represents a substantial gain in valuation precision.

Research implications

The evidence, therefore, suggests that equity-based composite modelling may offer substantial gains in valuation precision over single-factor multiples modelling.

Practical implications

In light of the fact that analysts’ reports typically contain various different multiples, it seems prudent to consider the inclusion of composite models as a more accurate alternative.

Originality/value

This study adds to the existing body of knowledge on the multiples-based approach to equity valuations by presenting composite modelling as a more accurate alternative to the conventional single-factor, multiples-based modelling approach.

Details

Journal of Economics, Finance and Administrative Science, vol. 22 no. 43
Type: Research Article
ISSN: 2077-1886

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Article
Publication date: 1 April 2006

Yong Keun Yoo

Aims to examine a comprehensive approach to combine several simple multiple valuation, so as to improve the valuation, accuracy of the simple multiple valuation technique.

Abstract

Purpose

Aims to examine a comprehensive approach to combine several simple multiple valuation, so as to improve the valuation, accuracy of the simple multiple valuation technique.

Design/methodology/approach

In order to combine several simple multiple valuations, the equity value is estimated by a weighted average of the valuation outcomes obtained from several simple multiple valuations. To calculate the weight of each valuation outcome, the out‐of‐sample price‐deflated regression of stock prices on several simple multiple valuation outcomes is conducted. Next, the alternative hypothesis of whether the composite approach yields a higher valuation accuracy than the simple multiple valuation is tested, using the actual stock price of the valued firm as the benchmark to measure the valuation accuracy under the assumption of market efficiency.

Findings

It was found that combining several simple multiple valuation outcomes of a firm, each of which is based on a stock price multiple to a historical accounting performance measure of the comparable firms (historical multiple), improves the valuation accuracy of the simple multiple valuation using a single historical multiple. However, further analysis shows that the combination of the simple multiple valuation outcomes based on a stock price multiple to analysts’ earnings forecasts of the comparable firms (forward earnings multiple) and several simple multiple valuation outcomes based on historical multiples does not improve the valuation accuracy of the simple multiple valuation using a forward earnings multiple.

Research limitations/implications

One caveat of this study is that only the linear combination of the simple multiple valuation outcomes is considered. Non‐linear combination of the simple multiple valuation outcomes based on both forward earnings multiple and historical multiples may be able to improve the valuation accuracy of the simple multiple valuation using a forward earnings multiple. This possibility is still an open question.

Practical implications

The findings imply that a historical multiple contains incremental information not captured by other historical multiples, which is useful for the improvement of the valuation accuracy. However, the historical multiples may have no incremental information beyond a forward earnings multiple.

Originality/value

The forward earnings multiples as well as the historical multiples for the equity valuations of broader firms are considered. Given the previous finding that forward earnings multiple presents the highest valuation accuracy among the valuation multiples, it is further investigated whether the composite approach using forward earnings multiple and historical multiples can improve the valuation accuracy of the simple multiple valuation using a forward earnings multiple. In addition, the potential problem of selection bias in the previous study is addressed, which examines only the equity valuations in the tax court.

Details

Review of Accounting and Finance, vol. 5 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 26 June 2009

Jack Camiolo, Salvatore Cantale and Michael Purcell

The purpose of this paper is to show how contingent claim valuation and, more precisely, structural models, can be used to value the debt and the equity of a corporation…

Abstract

Purpose

The purpose of this paper is to show how contingent claim valuation and, more precisely, structural models, can be used to value the debt and the equity of a corporation. The objective is to provide a general and unified valuation framework.

Design/methodology/approach

A discrete version of the Geske model in a binomial‐like environment is implemented. To make the analysis more applied, real data of a corporation – Lucent Technologies, Inc. are used – and the valuation is attempted.

Findings

Structural models can be used as a practical valuation tool. The results that are obtained are close to market data. Additionally, the authors are able to determine the price of some non‐traded claims (debt).

Research limitations/implications

While the more direct implication is that structural models can be used as a practical valuation tool, more applied research is needed to better calibrate the models.

Originality/value

To the applied finance literature is contributed by presenting a way of estimating the value of corporate debt and equity by calibrating a discrete version of Geske model. It is believed that this approach is not only interesting from the academic point of view, but can also serve as a useful tool for practitioners.

Details

International Journal of Managerial Finance, vol. 5 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 2 August 2011

Joseph J. French and Nazneen Ahmad

The purpose of this paper is twofold; first, to understand the long‐run dynamics between returns, valuation measures and foreign investment in the USA; second, to…

Abstract

Purpose

The purpose of this paper is twofold; first, to understand the long‐run dynamics between returns, valuation measures and foreign investment in the USA; second, to determine if these dynamics change following financial market upheaval.

Design/methodology/approach

To address long‐run dynamic nature of the variables, multivariate autoregressive models are fitted for the period of January 1977 to November 2008. To gain additional insight about the nature of equity flows its dynamics are analyzed over the periods containing the 1987 stock market crash and the two major asset bubbles, e.g. internet bubble and the housing bubble.

Findings

The authors find that foreign institutional equity flows are more sensitive to innovations in valuation measures than innovations to excess US market returns; and that foreign investors increase their purchases of US market capitalization following a positive innovation to measures of valuation. The results imply that the behavior of foreign institutional investors are not described by “return chasing” alone. The authors further find that in times of increased uncertainty the joint dynamics between foreign equity flows and valuation measures decouples. Finally consistent with existing literature it was found that equity flows to the USA are autocorrelated.

Originality/value

There is a broad literature on the dynamics of US investment in emerging and developed markets, but very little (if any) research that analyzes the dynamics of equity flows to the US, returns, and measures of valuation. Furthermore, the literature on the behavior of equity flows surrounding financial crises is scant, particularly for developed markets.

Details

Studies in Economics and Finance, vol. 28 no. 3
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 23 May 2008

Alex Faseruk and Alex Faseruk

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…

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

Management Research News, vol. 31 no. 6
Type: Research Article
ISSN: 0140-9174

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Article
Publication date: 1 January 2003

JORGE R. SOBEHART and SEAN C. KEENAN

Industry interest in equity‐based contingent claims models for evaluating credit risky securities has recently surged. These methods assume away valuation uncertainty that…

Abstract

Industry interest in equity‐based contingent claims models for evaluating credit risky securities has recently surged. These methods assume away valuation uncertainty that exists in practice. This article explores the impact of valuation uncertainty on these contingent claims models, by analyzing how varying levels of model uncertainty bias default probability estimates obtained from standard contingent claims models.

Details

The Journal of Risk Finance, vol. 4 no. 2
Type: Research Article
ISSN: 1526-5943

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Book part
Publication date: 12 July 2006

Arun Upneja and Nan Hua

This paper seeks to accomplish three objectives. First, based on prior research, this paper attempts to infer the value relevance of earnings and equity for firm valuation

Abstract

This paper seeks to accomplish three objectives. First, based on prior research, this paper attempts to infer the value relevance of earnings and equity for firm valuation in the restaurant industry. The second objective is to document the joint information content of earning and equity in firm valuation. Finally, the model tested above is used to evaluate the relevance of capital structure for firm valuation in the static capital structure framework. The empirical results indicate that the incremental R2 associated with earnings was found to be generally less than the incremental R2 associated with equity. The adjusted R2 of the model that included both earnings and equity ranged from 0.54 to 0.77. The results suggest that the addition of capital structure variables have no incremental explanatory power in explaining the market value of firm, in the presence of earnings and equity.

Details

Advances in Hospitality and Leisure
Type: Book
ISBN: 978-1-84950-396-9

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Article
Publication date: 8 June 2015

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

Review of Behavioral Finance, vol. 7 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 1 October 2003

G.A. Karathanassis and S.N. Spilioti

Early theoretical work on equity valuation suggests that equity prices are determined by variables such as dividends and growth in dividends. However, these “traditional”…

Abstract

Early theoretical work on equity valuation suggests that equity prices are determined by variables such as dividends and growth in dividends. However, these “traditional” views have been challenged by recent studies that seem to indicate that equity prices are determined by book value and discounted future abnormal earnings. This paper employs panel data methodology and equity prices from Athens Stock Exchange empirically to compare the performance of the traditional and the more recent models of equity valuation. The results show that the performance of the Ohlosn (1995) model is quite similar to that of the traditional models even though in some cases Ohlson’s model performance appears to be superior.

Details

Managerial Finance, vol. 29 no. 9
Type: Research Article
ISSN: 0307-4358

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