Journal articles: 'Firm's valuation'

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Cai, Jun, Miao Luo, and Alan J. Marcus. "Financial health and the valuation of corporate pension plans." Journal of Pension Economics and Finance 19, no. 4 (November 19, 2019): 459–90. http://dx.doi.org/10.1017/s1474747219000210.

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AbstractWe return to the long-standing question ‘Who owns the assets in a defined benefit pension plan?’ Unlike earlier studies, we condition the market's assessment of implicit property rights on the sponsoring firm's financial health. Valuations of financially strong firms, and those that are strengthening, are more responsive to pension plan funding. For these firms, each extra dollar of net plan assets is valued at between $0.50 and $1.00. In contrast, for weak and weakening firms, valuation effects are statistically indistinguishable from zero. This result is consistent with the higher likelihood that they will renege on their pension obligations.

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Jindra, Jan. "Seasoned Equity Offerings, Valuation and Timing: Evidence from 1980's and 1990's." Quarterly Journal of Finance 03, no. 03n04 (September 2013): 1350013. http://dx.doi.org/10.1142/s2010139213500134.

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While the existing literature has focused on whether firms issue equity when they are overvalued, this paper examines whether there was a better time to issue seasoned equity when the valuation of a firm's shares might have been even more favorable. Using three valuation approaches, the findings suggest that: (1) the valuation of firms issuing seasoned equity is the most favorable at the time of the offering and (2) the estimated valuation errors are significantly related to the probability that firms will undertake a seasoned equity issue. These results are consistent with firms optimizing the timing of the seasoned equity offering so as to take maximum possible advantage of misvaluation of their shares.

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Abel, Andrew B., and Janice C. Eberly. "Investment, Valuation, and Growth Options." Quarterly Journal of Finance 02, no. 01 (March 2012): 1250001. http://dx.doi.org/10.1142/s2010139212500012.

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We develop a model in which the opportunity for a firm to upgrade its technology to the frontier (at a cost) leads to growth options in the firm's value; that is, a firm's value is the sum of value generated by its current technology plus the value of the option to upgrade. Variation in the technological frontier leads to variation in firm value that is unrelated to current cash flow and investment, though variation in firm value anticipates future upgrades and investment. We simulate this model and show that, consistent with the empirical literature, in situations in which growth options are important, regressions of investment on Tobin's Q and cash flow yield small positive coefficients on Q and larger coefficients on cash flow. We also show that growth options increase the volatility of firm value relative to the volatility of cash flow.

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Fourati, Hedia, and Habib Affes. "Intellectual Capital Investment, Stakeholders' Value, Firm Market Value and Financial Performance: The Case of Tunisia Stock Exchange." Journal of Information & Knowledge Management 12, no. 02 (June 2013): 1350010. http://dx.doi.org/10.1142/s021964921350010x.

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The purpose of this paper is to investigate the role of intellectual capital investment in improving the firm's market value, stakeholders' value and financial performance. Using data drawn from 21 listed companies in Tunisia Stock Exchange, we conducted two studies. On one hand, from using Charreaux (Charreaux (2006). La valeur partenariale: Vers une mesure opérationnelle. Cahier de FARGO no. 1061103, November) measure of stakeholders' value, we demonstrate that financials come to present the weakest stakeholders' value and clients monopolises in term of value acquisition due to a weak ability of negotiation of firms. On the other hand, we construct a regression model of Pulic's value added intellectual capital investment (VAIC) as the measure of the value added from intellectual capital, in market valuation and financial performance. Our results stressed the fact that there is a positive impact of intellectual capital by human capital efficiency and capital employed efficiency on improving firm's market value. Nevertheless, financial performance measured by ROA is still justified by the traditional measure relying on capital employed efficiency. Indeed for Tunisian quoted firms, human capital investment is a pilar for ameliorating firm market valuation of financial performance.

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Geyskens, Inge, Katrijn Gielens, and Marnik G. Dekimpe. "The Market Valuation of Internet Channel Additions." Journal of Marketing 66, no. 2 (April 2002): 102–19. http://dx.doi.org/10.1509/jmkg.66.2.102.18478.

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The emergence of the Internet has pushed many established companies to explore this radically new distribution channel. Like all market discontinuities, the Internet creates opportunities as well as threats—it can be performance-enhancing as readily as it can be performance-destroying. Making use of event-study methodology, the authors assess the net impact of adding an Internet channel on a firm's stock market return, a measure of the change in expected future cash flows. The authors find that, on average, Internet channel investments are positive net-present-value investments. The authors then identify firm, introduction strategy, and marketplace characteristics that influence the direction and magnitude of the stock market reaction. The results indicate that powerful firms with a few direct channels are expected to achieve greater gains in financial performance than are less powerful firms with a broader direct channel offering. In terms of order of entry, early followers have a competitive advantage over both innovators and later followers, even when time of entry is controlled for. The authors also find that Internet channel additions that are supported by more publicity are perceived as having a higher performance potential.

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Allee, Kristian D., Devon Erickson, Adam M. Esplin, and Teri Lombardi Yohn. "The Characteristics, Valuation Methods, and Information Use of Valuation Specialists." Accounting Horizons 34, no. 3 (April 1, 2020): 23–38. http://dx.doi.org/10.2308/horizons-19-057.

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SYNOPSIS We provide insights into the inputs and valuation models used by valuation specialists. We survey 172 valuation specialists and conduct several follow-up interviews covering various topics, including the valuation inputs, models, and industry information that they use, as well as how they estimate long-term growth and the cost of capital. We find that valuation specialists rely on their professional judgment to select a valuation model but prefer the discounted cash flow (DCF) model. They primarily rely on the firm's historical performance when forecasting the financial statements, but communication with management is particularly relevant for forecasting future earnings or cash flows. When estimating the cost of capital, they most commonly use the risk-free rate with subjective adjustments. The results of our study provide insights on the information use of valuation specialists that are relevant to other valuation specialists, managers, academic researchers, and regulators. JEL classification: M41; G12; G17; G32.

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PAN, YONGHUA. "DESIGN AND VALUATION OF CORPORATE SECURITIES WITH STRATEGIC DEBT SERVICE AND ASYMMETRIC INFORMATION." International Journal of Theoretical and Applied Finance 02, no. 02 (April 1999): 201–19. http://dx.doi.org/10.1142/s0219024999000133.

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This paper studies the effects of strategic debt service, asymmetric information and their interaction on the valuation of corporate securities and on corporate financing decisions. By introducing information asymmetry into a continuous-time setting, our model is able to integrate these two factors in a unified framework. Such a model allows for obtaining valuation results in a separating equilibrium. The basic results of this paper imply that the risk premium of debt could be partly contributed by information effect. This part of risk premium could be very significant for those good firms with a project which will produce much higher cash flows than what the market expects. We also find that a firm's financing decision depends on its primitives: firms are more apt to rely on equity if they have: (1) high growth potential, (2) riskier projects, (3) higher ratio of intangible assets to total assets and (4) lesser information asymmetry; firms would prefer debt, otherwise.

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McCarthy, Daniel M., Peter S. Fader, and Bruce G. S. Hardie. "Valuing Subscription-Based Businesses Using Publicly Disclosed Customer Data." Journal of Marketing 81, no. 1 (January 2017): 17–35. http://dx.doi.org/10.1509/jm.15.0519.

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The growth of subscription-based commerce has changed the types of data that firms report to external shareholders. More than ever, companies are discussing and disclosing information on the number of customers acquired and lost, customer lifetime value, and other data. This has fueled an increasing interest in linking the value of a firm's customers to the overall value of the firm, with the term “customer-based corporate valuation” being used to describe such efforts. Although several researchers in the fields of marketing and accounting have explored this idea, their underlying models of customer acquisition and retention do not adequately reflect the empirical realities associated with these behaviors, and the associated valuation models do not meet the standards of finance professionals. The authors develop a framework for valuing subscription-based firms that addresses both issues, and they apply it to data from DISH Network and Sirius XM Holdings.

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Yee, Kenton K. "Opportunities Knocking: Residual Income Valuation of an Adaptive Firm." Journal of Accounting, Auditing & Finance 15, no. 3 (July 2000): 225–66. http://dx.doi.org/10.1177/0148558x0001500303.

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Maintaining a competitive edge requires a firm to replace deteriorating business lines with new projects. Accordingly, part of a firm's value resides in its ability to exploit new opportunities. This paper incorporates adaptation into Ohlson's residual income valuation framework and obtains an adaptation-adjusted valuation formula. Although parsimoniously cast, the model makes two predictions that are consistent with phenomena reported in the empirical literature: earnings convexity and complementarity. Moreover, the Appendix introduces an Equivalence Theorem relating Modigliani-Miller dividend invariance, complementarity, and convexity.

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Hyunhee Ki. "The Announcement effects of stock repurchase and dispositions and firm's valuation." Korea International Accounting Review ll, no. 45 (October 2012): 273–94. http://dx.doi.org/10.21073/kiar.2012..45.013.

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Arcelus, F. J., and B. A. Trenholm. "Identifying the firm's characteristics affecting the choice of inventory valuation methods." International Journal of Production Economics 23, no. 1-3 (October 1991): 11–16. http://dx.doi.org/10.1016/0925-5273(91)90043-s.

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Realdon, Marco. "Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors." Journal of Business Finance & Accounting 34, no. 5-6 (June 2007): 950–75. http://dx.doi.org/10.1111/j.1468-5957.2007.02013.x.

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Kaufinger, Gregory G., and Chris Neuenschwander. "Retail Apocalypse? Maybe blame accounting. Investigating inventory valuation as a determinant of retail firm failure." American Journal of Business 35, no. 2 (May 28, 2020): 83–101. http://dx.doi.org/10.1108/ajb-07-2019-0050.

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PurposeThe purpose of the study is to evaluate whether the selection of accounting method used to value inventory increases or decreases the probability of a retail firm's ability to remain in existence.Design/methodology/approachThis study employs a binary logistic regression model to predict group membership and the probability of failure. The study utilizes an unbalanced sample of US publicly traded failed and functioning retail firms over a ten-year period.FindingsThe results clearly support the conclusion that there is a difference in the probability of retail firm failure with respect to the accounting method used to value inventory. Merchants using a cost-based valuation method were 2.3 times more likely to fail than firms using a price-based method. The results also affirm existing bankruptcy literature by finding that profitability, liquidity, leverage, capital investment and cash flow are factors in retail failures.Practical implicationsThe results suggest that traditional merchants cannot simply blame e-commerce or shifts in demographics for the retail Apocalypse; good management and proper valuation of stock still matter.Originality/valueThis study is the first to look at firm failure in the retail sector after the great recession of 2008, in an era known as the “retail Apocalypse.” In addition, this study differs from other firm failure literature by incorporating cost- and price-based inventory valuation methods as a variable in firm failure.

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Cloyd, C. Bryan, Lillian F. Mills, and Connie D. Weaver. "Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax-Haven Countries." Journal of the American Taxation Association 25, s-1 (January 1, 2003): 87–109. http://dx.doi.org/10.2308/jata.2003.25.s-1.87.

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U.S. corporations that reorganize in tax-haven countries claim to save many millions of dollars in future U.S. corporate income taxes. However, because these “inversion” transactions may involve significant nontax costs, it is not obvious how they affect share value. We use Monte Carlo sampling to analyze the statistical significance of each inverting firm's abnormal returns around the date that it initially announced its intentions and board of director approval of an inversion transaction. We find that five of the 20 single-company expatriations in our analysis have significant negative announcement period returns and only two show significant positive returns. The remaining 13 inversions show no statistically significant market reaction in the announcement period. The average return in the announcement period across all 20 firms is negative, but not significantly different from zero. Overall, we do not detect obvious shareholder benefits from expatriations.

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Aguzzoni, Luca, Gregor Langus, and Massimo Motta. "The Effect of EU Antitrust Investigations and Fines on a Firm's Valuation." Journal of Industrial Economics 61, no. 2 (June 2013): 290–338. http://dx.doi.org/10.1111/joie.12016.

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Chang, Shao-Chi, Jung-Ho Lai, and Chen-Hsiang Yu. "The Intra-Industry Effect of Share Repurchase Deregulation: Evidence from Taiwan." Review of Pacific Basin Financial Markets and Policies 08, no. 02 (June 2005): 251–77. http://dx.doi.org/10.1142/s0219091505000361.

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Share repurchases were deregulated in Taiwan in 2000. The regulatory provisions and the government's stated aim of market stabilization provide a setting in which share repurchases are exclusively motivated by undervaluation. This study investigates if deregulation of share repurchases is an effective method of market stabilization by investigating the intra-industry effects of repurchase deregulation in Taiwan. We find that repurchasing firms and their corresponding rivals both experience strong value creation upon the repurchase announcements. The evidence suggests that the intra-industry effect of share repurchases is negatively associated with rivals' firm size, and positively associated with the announcing firm's abnormal return, the size of share repurchases and the similarity of business operation between rivals and repurchasing firms. These findings hold even after taking into account other effects that could influence the valuation of the rival firms.

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Bohušová, Hana, and Patrik Svoboda. "Deferred tax analysis and impact on firm's economic efficiency ratios." Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis 53, no. 6 (2005): 33–44. http://dx.doi.org/10.11118/actaun200553060033.

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Category of deferred income tax is a complex topic including the whole accounting system and the income tax. Calculation method can be time-consuming and demanding a high quality system of analytical evidence and a system of valuation and demanding the high level of accountants' knowledge. The aim in the theoretical level was to analyze process of calculation and recording of deferred tax. Importance of recording of deferred tax and the impact on financial analysis ratios was analyzed. Fourteen business entities were examined. Deferred tax recording is a legal way to reduce retained earnings a to protect of its careless alocation.

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D’Angelo, Thomas, Marco Lam, Samir El-Gazzar, and Rudolph Jacob. "GAAP-compliant versus non-GAAP voluntary disclosures relative to critical reporting dates." FINANCIAL REPORTING, no. 1 (April 2022): 5–40. http://dx.doi.org/10.3280/fr2022-001001.

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Purpose - This paper investigates the impact of generally accepted accounting principles (GAAP) and non-GAAP voluntary disclosures on equity returns for im-portant financial reporting dates. Design/methodology - Using hand-coded archival data, we developed 2,329 matched pairs consisting of non-GAAP (control) and GAAP (treatment) quarterly observations and compared the equity returns for each group around the earnings release and SEC filing dates. Findings - Our findings suggest that the valuation relevance of GAAP disclos-ing firms significantly exceeds that of non-GAAP firms in the case of earnings and cash flow surprises. These results support the notion that investors perceive GAAP-compliant disclosures as necessary, complementary information about a firm's performance and equity value. We also reveal that the market revaluation of equi-ty on the earnings release date significantly exceeded that on the SEC filing date. This finding confirms that the more comprehensive disclosure provided by GAAP firms on the earlier date preempted at least some of the information subsequently disclosed on the SEC filing date. Value - Extends the voluntary disclosure literature, in particular the valuation relevance of GAAP versus non-GAAP disclosures. The findings discussed in this paper are of special interest to policymakers and regulators, financial analysts, corporate managers, firm stakeholders, and academics interested in financial re-porting as they continue to study voluntary disclosure rules and practices.

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Ballester, Marta, Joshua Livnat, and Chandrakanth Seethamraju. "Individual-Firm Style Loadings, Unrecorded Economic Assets, and Systematic Risk." Journal of Accounting, Auditing & Finance 13, no. 3 (July 1998): 275–96. http://dx.doi.org/10.1177/0148558x9801300307.

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This study estimates individual-firm style loadings for classification of individual securities into growth (glamour) and value groups. Style loadings are similar to betas, measuring the comovement of a firm's return with the return on a particular style index. The study examines this classification by comparing the extent of unrecorded economic assets for growth and value firms. The study also examines the systematic-risk characteristics associated with this classification. Using Ohlson's (1995) valuation model, this study estimates the persistence of abnormal earnings for individual firms using time-series analysis. Growth firms are shown to have higher levels of abnormal earnings persistence than value firms, probably due to their greater levels of unrecorded economic assets than value firms. Indeed, the study finds that growth firms have greater levels of R&D and advertising intensity than value firms. The study also shows that growth and value firms differ in their systematic risk. Possibly due to the greater uncertainty associated with unrecorded economic assets, the systematic risks of growth firms are larger than those of value firms.

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Olsen, Kari Joseph, Kelsey Kay Dworkis, and S. Mark Young. "CEO Narcissism and Accounting: A Picture of Profits." Journal of Management Accounting Research 26, no. 2 (October 1, 2013): 243–67. http://dx.doi.org/10.2308/jmar-50638.

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ABSTRACT This study investigates the relationship between narcissistic personality characteristics in CEOs of Fortune 500 companies and financial performance measures of earnings-per-share (EPS) and stock valuation. Using panel data from 1992 through 2009, we show that firms with narcissistic CEOs have higher earnings-per-share and share price than those with non-narcissistic CEOs. We examine the mechanism driving the observed results and find that narcissistic CEOs are more likely to increase reported EPS through real and operational activities rather than accrual-based manipulations. The findings suggest that narcissistic personality characteristics of top executives affect financial performance measures through the executive's decisions and influence over the firm's operational activities rather than through accrual and accounting decisions. Data Availability: Data available upon request.

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Liu, Tingting. "The Information Provision in the Corporate Acquisition Process: Why Target Firms Obtain Multiple Fairness Opinions." Accounting Review 95, no. 1 (May 1, 2019): 287–310. http://dx.doi.org/10.2308/accr-52444.

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ABSTRACT Using a hand-collected dataset for takeovers from 1996 to 2013, I examine why some target firms obtain a second fairness opinion and the associated wealth effects of doing so. I find that multiple opinions are more likely to be used in deals in which management/investment bank conflicts of interest are high—e.g., buyouts and stapled financing deals. In addition, the use of a second opinion has a significantly positive impact on target shareholders' wealth in these two types of deals. Fairness opinion valuation predominantly relies on accounting data, and the benefit of seeking a second opinion increases with a firm's earnings quality. Collectively, the results suggest that a second opinion is used to facilitate transactions. JEL Classifications: G34; G24; J33.

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Ashuri, Baabak. "VALUATION OF FLEXIBLE LEASES FOR CORPORATE TENANTS FACING UNCERTAINTY IN THEIR REQUIRED WORK SPACE." International Journal of Strategic Property Management 14, no. 1 (March 31, 2010): 49–72. http://dx.doi.org/10.3846/ijspm.2010.05.

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A valuation approach is presented to price flexible leases with expansion, contraction, and/or cancelation options from the corporate tenant perspective. This model uses the real option valuation approach and determines the flexibility value or the option premium of a lease. This premium is the maximum amount of money that the tenant is willing to invest in incorporating a specific flexible feature in the leasing arrangement. Our model considers uncertainty in the rental market, as well as uncertainty about the firm's required workspace in an integrated valuation framework. Santruka Pristatomas vertinimo metodas, kaip iš komercinio nuomininko perspektyvos ikainoti lanksčiaja nuoma su galimybe didinti arba mažinti plota ir (arba) atsisakyti nuomos. Šiame modelyje, taikant realiu pasirinkimo sandoriu vertinimo metoda, nustatoma nuomos lankstumo verte arba priemoka už galimybe rinktis. Ši priemoka ‐ tai maksimali pinigu suma, kuria nuomininkas pasiruošes investuoti, idant i nuomos susitarima galetu itraukti konkretu punkta del lankstumo. Mūsu modelyje i nuomos rinkos netikruma ir i netikruma del imonei reikiamo darbo ploto atsižvelgiama taikant kompleksine vertinimo sistema.

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Aksoy, Lerzan, Sabine Benoit, Shreekant G. Joag, Jay Kandampully, Timothy Lee Keiningham, and An L. Yan. "Enterprise feedback management (EFM): what lies beyond the hype?" Journal of Service Management 32, no. 1 (July 28, 2020): 53–69. http://dx.doi.org/10.1108/josm-03-2020-0070.

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PurposeThe needs of CMOs to utilize a firm's data productively in order to support decision-making combined with the reported benefits of enterprise feedback management solutions has resulted in a rapid rise in usage and valuation of EFM providers. The explicit promise of EFM providers is improved financial performance, whereas there is no scientific research investigating this link. To investigate the link between EFM usage and financial performance is core of this research.Design/methodology/approachTo gain insight into this link survey data from 127 US-based firms on their usage of EFM platforms was linked to their stock market performance over several years.FindingsThis research did not find any significant positive relationships between different aspects of EFM usage investigated and stock returns. It is important to note that these results should not be taken as validation that EFM systems do not result in positive financial outcomes for firms. It may be that superior market performance as measured through stock returns is difficult to observe through a cross-sectional analysis. Instead these results indicate that superior market performance as measured through stock market performance is not an obvious, generalizable outcome for firms that have adopted EFM systems.Originality/valueEFM has rapidly grown across many consumer facing industries, with EFM platform providers receiving very high market valuations on relatively small revenue streams. This is one of the first scientific papers to study the usage and impact of these EFM systems.

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Callen, Jeffrey L., and Mindy Morel. "A Lintnerian Linear Accounting Valuation Model." Journal of Accounting, Auditing & Finance 15, no. 3 (July 2000): 301–14. http://dx.doi.org/10.1177/0148558x0001500307.

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This paper develops and tests a linear valuation accounting model based on Lintner's (1956) dividend model. Two test methodologies are employed on a firm-level time-series basis. First, abstracting from the nonlinear relationships among the parameters, the information dynamic and valuation equation are estimated by linear OLS and linear SUR. The estimated equations are evaluated by reference to the sign and value predictions of the model. Second, recognizing the underlying nonlinear relationships among the parameters, the Lintnerian system of equations is estimated by nonlinear OLS and nonlinear SUR. All parameters are estimated endogenously at the firm level, including each firm's cost of capital. The resulting parameter estimates are evaluated for statistical and, in the case of costs of capital, for economic significance. Results of the first (linear) methodology by and large confirm the validity of the Lintner model. The signs and values of the estimated coefficients are consistent with the predictions of the Lintner model except that the (mean) estimated book value coefficient in the price equation exceeds its theoretical upper bound. The results of the second (nonlinear) methodology are somewhat more problematic. Although the Lintner model yields statistically significant firm-level costs of capital, these estimates are not economically significant for the sample period.

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Levitas, Edward, and Tailan Chi. "A REAL OPTION PERSPECTIVE ON THE MARKET VALUATION OF A FIRM'S TECHNOLOGICAL COMPETENCE." Academy of Management Proceedings 2001, no. 1 (August 2001): F1—F6. http://dx.doi.org/10.5465/apbpp.2001.6123180.

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EICHLER, A., G. LEOBACHER, and H. ZELLINGER. "NOTES ON EXACT AND SEMI-EXACT LÉVY MODELS FOR THE VALUATION OF CDOs." International Journal of Theoretical and Applied Finance 13, no. 06 (September 2010): 979–1000. http://dx.doi.org/10.1142/s0219024910006078.

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We investigate the effects of certain simplifying assumptions that are often made when valuating tranches of collateralized debt obligations (CDOs) using a firm's value approach. Those assumptions are the homogeneity and largeness of the portfolio and the so-called European approximation. The error made in this way is measured by comparing the result to a model with less simplification which is evaluated by the use of Monte Carlo simulation.

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AMMANN, MANUEL, and MICHAEL VERHOFEN. "THE CONGLOMERATE DISCOUNT: A NEW EXPLANATION BASED ON CREDIT RISK." International Journal of Theoretical and Applied Finance 09, no. 08 (December 2006): 1201–14. http://dx.doi.org/10.1142/s0219024906004025.

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We present a simple new explanation for the diversification discount in the valuation of firms. We demonstrate that, ceteris paribus, limited liability of equity holders is sufficient to explain a diversification discount. To derive this result, we use a credit risk model based on the value of the firm's assets. We show that a conglomerate can be regarded as an option on a portfolio of assets. By splitting up the conglomerate, the investor receives a portfolio of options on assets. The conglomerate discount arises because the value of a portfolio of options is always equal to or higher than the value of an option on a portfolio. The magnitude of the conglomerate discount depends on the number of business units and their correlation, as well as their volatility, among other factors.

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Morris, James R. "Growth in the Constant Growth Model." Business Valuation Review 25, no. 4 (January 1, 2006): 153–62. http://dx.doi.org/10.5791/0882-2875-25.4.153.

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Abstract This article discusses the conditions that justify the use of the constant growth model. The constant growth model is very sensitive to the assumptions regarding the firm's operating ratios, capital structure, and dividend policy. If the constant growth model is used and these factors are not coordinated and consistent, the valuation estimate using the equity method will not agree with the valuation estimate obtained with the invested capital method. On the other hand, if all the factors are coordinated, or “in sync,” these two methods will generate identical values when the constant growth model is used. Data presented at the end of the article suggests that only a small proportion of companies have growth rates that would make them good candidates to be valued using the constant growth model.

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Drake, Katharine D., Nathan C. Goldman, and Stephen J. Lusch. "Do Income Tax-Related Deficiencies in Publicly Disclosed PCAOB Part II Reports Influence Audit Client Financial Reporting of Income Tax Accounts?" Accounting Review 91, no. 5 (November 1, 2015): 1411–39. http://dx.doi.org/10.2308/accr-51338.

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ABSTRACT Deloitte's 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm's quality controls with respect to auditing income tax accounts. We investigate whether Deloitte's actions to remediate the PCAOB's concerns are associated with changes to their clients' financial reporting for income taxes. We find that Deloitte's clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte's clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.

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J. Glover, Kristoffer, and Gerhard Hambusch. "The trade-off theory revisited: on the effect of operating leverage." International Journal of Managerial Finance 10, no. 1 (January 28, 2014): 2–22. http://dx.doi.org/10.1108/ijmf-03-2013-0034.

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Purpose – The purpose of this paper is to investigate the effect of operating leverage, and the subsequent abandonment option available to managers, on the relationship between corporate earnings and optimal financial leverage, thereby providing an alternative (rational) explanation for the observed negative relationship between these two quantities. Design/methodology/approach – Working in a dynamic capital structure setting, where corporate earnings are modelled as an exogenous stochastic process, the paper explicitly adds fixed operating costs to the firm's value optimisation. This introduces a degree of operating leverage (DOL) and a non-zero value to the implicit abandonment option of the firm's manager. Solving for the firm's optimal timing and financing decisions the paper is able to derive the relationship between current corporate earnings and optimal financial leverage for a large class of earnings uncertainty assumptions. The theoretical implications are then tested empirically using a large selection of S&P 500 firms. Findings – The analysis reveals that the manager's flexibility to abandon the project introduces nonlinearities into the valuation that are sufficient to reconcile the trade-off theory with the empirically observed negative earnings/financial leverage relationship. The paper further finds theoretical and empirical evidence of a positive relationship between operating and financial leverage. Originality/value – Previous studies have used mean-reverting earnings as an explanation for the observed negative earnings/financial leverage relationship in a trade-off theory setting. The paper shows that the relationship does not need to be process specific. Instead, it is a direct result of the financial flexibility of managers.

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Dunn, Kimberly, Mark Kohlbeck, and Matthew Magilke. "Future Profitability, Operating Cash Flows, and Market Valuations Associated with Offshoring Arrangements of Technology Jobs." Journal of Information Systems 23, no. 2 (September 1, 2009): 25–47. http://dx.doi.org/10.2308/jis.2009.23.2.25.

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ABSTRACT: We investigate profitability, operating cash flows, and value relevance associated with offshoring arrangements of technology-oriented jobs. Offshoring is the business practice of moving substantial portions of a firm's business operations (and jobs) to another country usually to take advantage of lower labor costs or other production factors in developing countries. Offshoring carries social costs as local jobs are lost which may limit realization of benefits. We find that firms that offshore technology-oriented jobs report greater earnings and operating cash flows following an offshoring event as the relative size of the offshoring arrangement increases. Consistent with these results, the market only values offshoring beyond the impact recognized in the financial statements for larger offshoring arrangements. A valuation discount actually exists for smaller offshoring arrangements suggesting either (1) costs exceed potential benefits or (2) the perception that benefits are only realized through economies of scale. We document both benefits and costs that are important for those firms considering offshoring arrangements and their stakeholders.

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Matolcsy, Zoltan P., and Anne Wyatt. "The Association between Technological Conditions and the Market Value of Equity." Accounting Review 83, no. 2 (March 1, 2008): 479–518. http://dx.doi.org/10.2308/accr.2008.83.2.479.

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The objective of this study is to provide evidence on how technological innovation conditions underlying the firm's investments drive earnings growth and, hence, market value of equity. Technologies develop and flourish or die out through the combined investment decisions of those firms doing the inventing, and those firms that adopt those inventions, and thereby help to spread (or diffuse) the innovations into wider use. Hence, technology is important for the investment decisions of all firms, regardless of whether they patent. We focus on three aggregate measures of technological innovation conditions: the success rate of past technological investments, technology complexity, and the technology development period. We use the interactions between each of these three conditions with earnings to capture the combined effect on market value of a firm's technological innovation environment. Our sample comprises 12,594 U.S. firm years for the period 1990–2000 including firms actively producing new technologies and firms that adopt technologies for their processes and products. Our primary and additional tests suggest that the interactions capture value-relevant information not reflected in commonly used variables including industry, research and development, sales, general, and administration expenses, risk, and growth. We also triangulate our results by providing evidence that aggregate technological innovation conditions predict future earnings and are, hence, instrumental in the earnings-generation process. This paper extends the valuation literature by (1) developing a generalizable framework that explains how technological innovation conditions link to future earnings and therefore map into the market value of equity; (2) developing aggregate measures of technological innovation conditions that are relevant for estimating future earnings and value for all firms; and (3) providing detailed empirical evidence on the relation between these aggregate measures and the market value of equity and earnings for all firms not just those that patent.

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Hanafizadeh, Payam, Seyed Saeed Hosseinioun, and Hamid Reza Khedmatgozar. "Financial Valuation of a Business Model as an Intangible Asset." International Journal of E-Business Research 11, no. 4 (October 2015): 17–31. http://dx.doi.org/10.4018/ijebr.2015100102.

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Knowledge-based economies rely greatly on intangible assets. Based on its features, a business model can be an intangible asset; by posing barriers to imitation, it can create competitive advantage and increase a company's value. Hence, a business model's financial valuation is of great importance. Accordingly, the main objective of the present study is to design a process to valuate business models, using income approach and the concept of competitive advantage. An active corporation engaged in daily deal business was chosen as a case study. Its business model is identified and then valued using the proposed process. The results revealed that the process has reasonable accuracy. Financial valuation of business models is useful for bridging the gap between book value and market value, increasing a firm's ability to raise capital from venture capitalists, improving bargaining power in M&A contracts and providing support in the case of litigation.

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Covrig, Vicentiu, Daniel McConaughy, Adam Newman, Pavan Kumar Nadiminti, and Mary Ann K. Travers. "Volatility of Financial Metrics: Important Data for Contingent Consideration Valuations." Business Valuation Review 40, no. 3 (November 1, 2021): 80–96. http://dx.doi.org/10.5791/bvr-d-20-00013.

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This article presents the first detailed statistical analysis of the volatilities of various commonly encountered financial metrics used in contingent consideration (and earn-out) agreements. The valuation of contingent consideration using an option-based methodology and non-equity volatilities is becoming more common in business valuation. We provide clear evidence that the volatility of five financial metrics—revenue; earnings before interest, taxes, depreciation, and amortization (EBITDA); EBIT, net income, and total assets—is strongly, negatively related to firm size and profitability. However, contrary to common belief, the volatility of these metrics is not related to a firm's financial leverage. We also calculated the volatilities using four different methodologies that are employed in practice. Although no theory guides the selection of methodologies, based upon our work, we have found that the year-over-year growth rate, using a quarterly frequency, provides the most reasonable results.

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Waegenaere, Anja De, Richard C. Sansing, and Jacco L. Wielhouwer. "Valuation of a Firm with a Tax Loss Carryover." Journal of the American Taxation Association 25, s-1 (January 1, 2003): 65–82. http://dx.doi.org/10.2308/jata.2003.25.s-1.65.

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This paper examines the effects of a tax loss carryover on the market and book values of a firm's assets. The loss carryover has a direct effect on market value by sheltering future income from tax, and a direct effect on book value due to the recognition of a deferred tax asset. The failure to discount the deferred tax asset to its present value causes the market-to-book ratio of the deferred tax asset to be less than 1. However, positive skewness in the distribution of future taxable income can cause the market-to-book ratio to exceed 1 because the market value depends on the mean level of future tax benefits, while the book value is based on the median level of future tax benefits. The loss carryover also has an indirect effect on firm value in that it induces the firm to exercise its real option to invest early. This reduces firm value before investment takes place and decreases the market-to-book ratio of physical assets after investment takes place.

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LAU, KA WO, and YUE KUEN KWOK. "VALUATION OF EMPLOYEE RELOAD OPTIONS USING UTILITY MAXIMIZATION APPROACH." International Journal of Theoretical and Applied Finance 08, no. 05 (August 2005): 659–74. http://dx.doi.org/10.1142/s0219024905003189.

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The reload provision in an employee stock option is an option enhancement that allows the employee to pay the strike upon exercising the stock option using his owned stocks and to receive new "reload" stock options. The usual Black–Scholes risk neutral valuation approach may not be appropriate to be adopted as the pricing vehicle for employee stock options, due to the non-transferability of the ownership of the options and the restriction on short selling of the firm's stocks as hedging strategy. In this paper, we present a general utility maximization framework to price non-tradeable employee stock options with reload provision. The risk aversion of the employee enters into the pricing model through the choice of the utility function. We examine how the value of the reload option to the employee is affected by the number of reloads outstanding, the risk aversion level and personal wealth. In particular, we explore how the reload provision may lower the difference between the cost of granting the option and the private option value and improve the compensation incentive of the option award.

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Feltham, Gerald A., and James A. Ohlson. "Residual Earnings Valuation With Risk and Stochastic Interest Rates." Accounting Review 74, no. 2 (April 1, 1999): 165–83. http://dx.doi.org/10.2308/accr.1999.74.2.165.

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This paper provides a general version of the accounting-based valuation model that equates the market value of a firm's equity to book value plus the present value of expected abnormal earnings. Prior theoretical work (e.g., Ohlson 1995; Feltham and Ohlson 1995, 1996) assumes investors are risk neutral and interest rates are nonstochastic and flat. Our more general analysis rests on only two assumptions: no arbitrage in financial markets and clean surplus accounting. These assumptions imply a risk-adjusted formula for the present value of expected abnormal earnings. The risk adjustments consist of certainty-equivalent reductions of expected abnormal earnings. A key issue deals with the capital charge component of abnormal earnings. It is measured by applying the (uncertain) riskless spot interest rate to start-of-period book value. Risks do not affect the rate used in the capital charge, and accounting policies do not affect the formula's constructs. An application of the general formula shows how the classic risk-adjusted expected cash flows model derives as a special case.

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Afego, Pyemo N., and Imhotep P. Alagidede. "What does corporate social advocacy signal? Evidence from boycott participation decisions." Journal of Capital Markets Studies 5, no. 1 (March 16, 2021): 49–68. http://dx.doi.org/10.1108/jcms-10-2020-0040.

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PurposeThis paper explores how a firm's public stand on a social-political issue can be a salient signal of the firm's values, identity and reputation. In particular, it investigates how boycott participation–conceptualized as a cue of a corporation's stand on important social-political issues–may affect the stock market valuation of that corporation, as well as how corporations legitimise their stand on the issues.Design/methodology/approachThe authors employ a mixed-methods design that uses both qualitative techniques (content analysis) and quantitative methods (event study methodology) to examine a sample of US firms who participated in a boycott campaign that sought to call attention to issues of hate speech, misinformation and discriminatory content on social media platform Facebook.FindingsFindings from the qualitative content analysis of company statements show that firms legitimise their stand on, and participation in, the boycott by expressing altruistic values and suggesting to stakeholders that their stand aligns not only with organizational values/convictions but also with the greater social good. Importantly, the event study results show that firms who publicly announced their intention to participate in the boycott, on average, earn a statistically significant positive abnormal stock return of 2.68% in the four days immediately after their announcements.Research limitations/implicationsFindings relate to a specific case of a boycott campaign. Also, the sample size is limited and restricted to US stocks. The signalling value of corporate social advocacy actions may vary across countries due to institutional and cultural differences. Market reaction may also be different for issues that are more charged than the ones examined in this study. Therefore, future research might investigate other markets, use larger sample sizes and consider a broader range of social-political issues.Practical implicationsThe presence of significant stock price changes for firms that publicly announced their decision to side with activists on the issue of hate propaganda and misinformation offers potentially valuable insights on the timing of trades for investors and arbitrageurs. Insights from the study also provide a practical resource that can be used to inform organizations' decision-making about such issues.Social implicationsTaking the lead to push on social-political issues, such as hate propaganda, discrimination, among others, and communicating their stands in a way that speaks to their values and identity, could be rewarding for companies.Originality/valueThis study provides novel evidence on the impact that corporate stances on important social-political issues can have on stock market valuation of firms and therefore extends the existing related research which until now has focused on the impact on consumer purchasing intent and brand loyalty.

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Ricci, Federica, Vincenzo Scafarto, Salvatore Ferri, and Teresa Riso. "Management control systems in the knowledge economy: Assessing the role of intellectual capital in." MANAGEMENT CONTROL, no. 3 (October 2020): 17–34. http://dx.doi.org/10.3280/maco2020-003002.

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The purpose of this paper is to show that intellectual capital (IC) efficiency as measured by the value added intellectual coefficient (VAIC) and its individual components may function as key performance indicators for use in management control and external reporting to capital market participants. We incorporate the VAIC within the Ohlson model (OM), a widely used model for equity valuation, which relates a firm's market value to the book value of equity and net earnings, and allows to include any other information that may affect the market assess-ment of firm value. We then estimate the modified OM on a panel sample of firms continuously listed on the Italian Stock exchange from 2011 to 2017 using a fixed effect (FE) specification. Empirical results indicate that IC efficiency contributes along with the traditional accounting metrics included in the OM to explain the stock market performance of sample firms. This paper suggests that the VAIC and the individual measures of IC efficiency may usefully complement traditional accounting measures of performance.

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Joos, Peter, and George A. Plesko. "Valuing Loss Firms." Accounting Review 80, no. 3 (July 1, 2005): 847–70. http://dx.doi.org/10.2308/accr.2005.80.3.847.

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We investigate whether investors price losses conditional on the likelihood of the firm's return to profitability, consistent with the abandonment option hypothesis (Hayn 1995). We first develop a loss-reversal model to define subsamples of persistent and transitory losses. We find that on average investors price transitory losses positively over the sample period, as if a transitory loss indicates a low likelihood of exercising the abandonment option. We also observe that early in the sample period investors do not price persistent losses, as predicted by the abandonment option hypothesis. By contrast, later in the sample period, larger persistent losses correspond to higher returns, inconsistent with the prediction of the abandonment option hypothesis. To understand why we observe a change in the valuation of persistent losses over the sample period, we study their components and establish the key role of R&D for their valuation. We find that investors do not price persistent losses without an R&D component, consistent with these losses indicating financial distress and a higher likelihood of exercising the abandonment option. However, when persistent losses contain R&D, investors separately value the R&D component as an asset and the non-R&D component as if it is a transitory loss. Thus, investors do not consider losses to be homogeneous, but consider the causes and nature of the loss to assess its long-term implications for firm value.

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Cajias, Marcelo, Franz Fuerst, and Sven Bienert. "Can investing in corporate social responsibility lower a company's cost of capital?" Studies in Economics and Finance 31, no. 2 (May 27, 2014): 202–22. http://dx.doi.org/10.1108/sef-05-2013-0067.

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Purpose – This paper aims to investigate the effect of corporate social responsibility (CSR) ratings on the ex ante cost of capital of more than 2,300 listed US companies in a panel from 2003 to 2010. It examines whether financial markets value continuous investment in CSR activities through higher market capitalization and lower cost of capital. Design/methodology/approach – The measure of the cost of capital reflects the perceived riskiness of individual companies expressed in the unobserved internal rate of return that investors expect to hold a risky asset. Based on descriptive portfolio estimations, panel and quantile regressions, the authors model the cost of equity capital as a function of CSR strengths and concerns obtained from the KLD-database and accounting controls. Findings – The authors show that firms' CSR strategies differ significantly across industry sectors. Customer-orientated companies such as telecommunications and automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, the authors find a 10-bp positive effect for one standard deviation of firms' intensive allocation of resources in sustainable activities. Research limitations/implications – Since the authors are interested in the effect environmental, social and governance activities have on the firm's perceived market valuation rate, the authors apply the Fama-French model because of its efficiency in explaining realized returns, rather than incorporating analyst's long-term growth forecasts into the proxy for the equity premium. Practical implications – Managers of companies with low or intermediate CSR scores may consider the financial benefits of improving their social and environmental performance. A good starting point is usually to draw up a company-wide CSR agenda, possibly guided by a dedicated CSR task force, mapping out the potential costs and benefits of such measures. In addition, by improving their CSR ratings, a company may get access to additional resources, ranging from the growing ethical investment industry to employees for whom CSR performance matters when choosing an employer. Originality/value – The authors expand the existing literature by considering firm's CSR level to be in relation to the overall CSR performance and decompose firm's CSR agenda into strengths and concerns rather than counting the number of activities a firm is involved in. The applied methodology allows a better understanding of firm's CSR agenda and its implication for capital markets and investors on both long and short investment terms.

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YunBok-Yook and Sung-Yong Ryu. "Relative Valuation Roles of Equity Book Value and Net Income as a Type of Firm's Characteristics." Tax Accounting Research ll, no. 27 (December 2010): 103–24. http://dx.doi.org/10.35349/tar.2010..27.005.

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Dempsey, Mike. "Capital Gains Tax: Implications for the Firm's Cost of Capital, Share Valuation and Investment Decision-Making." Accounting and Business Research 28, no. 2 (March 1998): 91–96. http://dx.doi.org/10.1080/00014788.1998.9728901.

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Dempsey, Mike. "Capital gains tax: Implications for the firm's cost of capital, share valuation and investment decision-making." Accounting and Business Research 28, no. 4 (September 1998): 317. http://dx.doi.org/10.1080/00014788.1998.9728918.

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Cormier, Denis, and Michel Magnan. "The revisited contribution of environmental reporting to investors' valuation of a firm's earnings: An international perspective." Ecological Economics 62, no. 3-4 (May 2007): 613–26. http://dx.doi.org/10.1016/j.ecolecon.2006.07.030.

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Vishwanath, S. R., and Kulbir Singh. "Hindustan Unilever Ltd." Asian Case Research Journal 16, no. 02 (December 2012): 269–87. http://dx.doi.org/10.1142/s0218927512500113.

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In early 2008 an analyst at a prominent Investment Bank in India was analyzing the dividend policy of Hindustan Unilever Limited (HUL), a well-known multinational. The case's protagonist, an equity analyst, must figure out the implications of the firm's dividend policy on the investment and financing activities and the valuation of the firm. She also has to decide what investment recommendation she should give in the light of the analysis. The case describes the Indian FMCG industry as India enters the new millennium. The case details HUL's financial position in an era of increasing competition. Priya must decide whether the dividend policy of HUL is sustainable.

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Ramakrishnan, Ram T. S., and Jacob K. Thomas. "What Matters from the Past: Market Value, Book Value, or Earnings? Earnings Valuation and Sufficient Statistics for Prior Information." Journal of Accounting, Auditing & Finance 7, no. 4 (October 1992): 423–64. http://dx.doi.org/10.1177/0148558x9200700402.

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A number of recent analytical and empirical papers seek to identify the variables that best explain stock prices. We derive the relation between prices and earnings for three one-parameter “excess earnings” evolution processes that describe three different ways in which current period shocks to earnings persist in future. In each case, we show that price is a weighted average of capitalized current earnings and a sufficient statistic for all past information. The sufficient statistics are three amounts from last year: book value, market value, and capitalized earnings. Using time-series data over the 1969-1988 period for a sample of 511 firms, we estimate firm-specific excess earnings regressions and price regressions for the three cases. Although the book value model provides the best fit for a majority of firms for the excess earnings regressions, the market value model is far superior for the price regressions. We argue that this latter result is due to prior period price (included in the market value model alone), reflecting other information that is not explicitly modeled here. Despite this bias in favor of the market value model for the price regressions, we find a positive cross-sectional association between the relative explanatory power of the three models in the excess earnings regressions and the corresponding relative explanatory power in the price regressions. That is, if a firm's excess earnings series is best described by a particular model, its price series is also likely to be best described by the valuation relation derived from the same model.

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Danielson, Morris G., and Thomas D. Dowdell. "The Return-Stages Valuation Model and the Expectations within a Firm's P/B and P/E Ratios." Financial Management 30, no. 2 (2001): 93. http://dx.doi.org/10.2307/3666407.

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Dambra, Michael J., Matthew Gustafson, and Phillip J. Quinn. "Tax-Advantaged Trust Use Among IPO Executives: Determinants and Implications for Valuation and Future Performance." Accounting Review 95, no. 3 (October 5, 2019): 145–75. http://dx.doi.org/10.2308/accr-52590.

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ABSTRACT We examine the prevalence and determinants of CEOs' use of tax-advantaged trusts prior to their firm's IPO. Twenty-three percent of CEOs use tax-advantaged pre-IPO trusts, and share transfers into tax-advantaged trusts are positively associated with CEO equity wealth, estate taxes, and dynastic preferences. We project that pre-IPO trust use increases CEOs' dynastic wealth by approximately $830,000, on average. We next examine a simple model's prediction that trust use will be positively related to IPO-period stock price appreciation. We find that trust use is associated with 12 percent higher one-year post-IPO returns, but is not significantly related to the IPO's valuation, filing price revision, or underpricing. This evidence is consistent with CEOs' personal finance decisions prior to the IPO containing value-relevant information that is not immediately incorporated into market prices. JEL Classifications: D14; G12; G32; M21; M41. Data Availability: Data are available from the public sources cited in the text.

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Memon, Asadullah, and Arifa Bano Talpur. "Determinants of Dividend Policy and its Impact on Firm's Value: An Evidence of Automobile Sector in Pakistan." Global Strategic & Securities Studies Review VII, no. II (June 30, 2022): 94–110. http://dx.doi.org/10.31703/gsssr.2022(vii-ii).11.

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Research on a company's dividend policy is crucial because it ultimately affects the growth and performance of the company. The study's objective is to determine the variables that affect dividend policy, and both micro and macroeconomic indicators have been selected. Dividend policy is an important factor that successfully mediates the connection between certain economic variables and the firm value. Data were gathered from five publicly traded automobile firms in Pakistan for the years 2011 to 2021. The stock price valuation of automobile companies has been determined using the Linear Regression Model for relationship analysis of variables and the Sobel test method for the mediation impact of dividend policy. The study's findings demonstrate that economic variables like micro and macro include a most important impact on the dividend policy, and the results of the Sobel technique and findings on the stock prices of Pakistan’s automobile firms confirm these findings.

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Journal articles on the topic 'Firm's valuation'

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