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The Market Reaction to the Choice of Accounting Method for Stock Splits and Large Stock Dividends

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Graeme Rankine; Earl K. Stice

Prior research has used inaccurate classification rules to distinguish between stock splits and stock dividends. The CRSP classification of two-for-one stock distributions agrees with the actual accounting treatment only 23% of the time. In addition, the accounting treatment impacts the announcement period reaction-two for one distributions accounted for as stock dividends are associated with five-day announcement period returns of 2,70%, significantly greater that the 0,93% announcement returns for distributions accounted for as stock splits. Announcement returns are posi....

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Earnings and Stock Splits

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Paul Asquith; Paul Healy; Krishna Palepu

This paper examines whether stock splits convey information about earnings. The results indicate that firms split their shares after a significant increase in earnings. Before the stock split announcement, the market expects these earnings increase to be temporary. The split announcement leads investors to increase their expectations that the past earnings increases are permanent. The evidence also suggest that the market's reaction to split announcement cannot be attributed to expectations of either future earnings increases or near-term cash dividend increases.

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Ownership Structure, Financial Constraints and Investment Decisions: Evidence from a Panel of Italian Firms

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Francesco Crespi and Giuseppe Scellato

Over the past two decades, a wide empirical literature has addressed the theme of firm-level financial constraints, supporting the hypothesis that the availability of internal funds is indeed a major driver of investment decisions. The largest part of such empirical analyses detects the presence of liquidity constraints from the observation of differentials in investment-cash flow elasticities among sub groups of companies. However, the theoretical side of the issue is still debated. Investment – cash flow sensitivity can be attributed to the presence of two different factors: asymmetric information on capital markets or internal agency problems leading to overinvestment by the management. In this paper, using a new sample of 1035 Italian manufacturing firms observed in the period 1998-2003, we try to disentangle the different potential determinants underlying the observed positive elasticity between investments and internal resources by accounting for both the ownership structure of the companies and the role played by financial intermediaries as both investors and debt-holders. The most interesting result emerging from our analysis is related to the presence of an inverted – U relationship between concentration of ownership and the elasticity of investment to cashflow. The overall evidence is supportive of the hypothesis that the elevated dependence of investment in both tangible and intangible capital on internal resources cannot be fully attributed to frictions on the credit market.

Over the past two decades, a wide empirical literature has addressed the theme of
firm-level financial constraints, supporting the hypothesis that the availability of internal funds is indeed a major driver of investment decisions (Himmelberg and Petersen, 1994; Schiantarelli, 1996; Carpenter and Petersen, 2002; Audretsch and Elston 2002). The largest part of such empirical analyses is based on refinements of the original model by Fazzari, Hubbard and Petersen (1988) which derives the presence of liquidity constraints from the observation of differentials in investment-cash flow elasticities among sub groups of companies. In this context, a significantly higher dependence through time of investments to internally generated cash flow can be interpreted as a signal of a higher premium on external financial resources.

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Leverage and Investment in Diversified Firms

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Seoungpil Ahn and David J. Denis

Abstract
Within diversified firms, the negative impact of leverage on investment is significantly greater for high q than for low q segments, and significantly greater for non-core than for core segments. This is consistent with the view that diversified firms allocate a disproportionate share of their debt service burden to their higher q and non-core segments. We also find that among low-growth firms, the positive relation between leverage and firm value is significantly weaker in diversified firms than in focused firms. We conclude that the disciplinary benefits of debt are partially offset by the additional managerial discretion in allocating debt service that is provided by the diversified organizational structure.

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Firm Ownership and Investment Efficiency in China

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. David Dollar and Shang-Jin Wei

Based on a survey that we designed and that covers a stratified random sample of 12,400 firms in 120 cities in China with firm-level accounting information for 2002-2004, this paper examines the presence of systematic distortions in capital allocation that result in uneven marginal returns to capital across firm ownership, regions, and sectors. It provides a systematic comparison of investment efficiency among wholly and partially state-owned, wholly and partially foreign-owned, and domestic privately owned firms, conditioning on their sector, location, and size
characteristics. It finds that even after a quarter-of-century of reforms, state-owned firms still have significantly lower returns to capital, on average, than domestic private or foreign-owned firms. Similarly, certain regions and sectors have consistently lower returns to capital than other regions and sectors. By our calculation, if China succeeds in allocating its capital more efficiently, it could reduce its investment intensity by 5 percent of GDP without sacrificing its economic growth (and hence deliver a greater improvement to its citizens’ living standard).

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VALUE BASED MANAGEMENT: Economic Value Added or Cash Value Added?

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Fredrik Weissenrieder

Corporate managers now face a period where a new economic framework that better reflects value and profitability must be implemented in their companies. Accounting systems, which has been used up until today, are insufficient and will not stand the challenge from the increasingly efficient capital markets and owners. The increased efficiency at the capital markets requires that capital allocation within companies become more efficient and it is therefore not possible for companies to in the future
allocate capital as inefficient as they do today. A new economic framework, a Value Based Manage-ment framework that better reflects opportunities and pitfalls, is therefore necessary. In my opinion, there are four major frameworks within Value Based Management; Economic Value Added (EVA®1), Cash Value Added (CVA2), Cash Flow Return on Investments (CFROI), and Share-holder Value Analysis (SVA). A company can chose one of these four for their company's economic framework of the future. The choice will have a substantial effect on management resources, strategy choices, and on how investors, analysts, media, etc view the company. This paper will deal with EVA and CVA, the two most frequent concepts in Sweden. Many things are being said about the two frameworks. I will in this paper present my reflections on a few similarities and differences of the two frameworks. In section 2 I will briefly discuss Value Based Management in general. Section 3 discusses the parts of the CVA concept that is necessary for the comparison with EVA. Section 4 discusses the parts of the EVA concept that is necessary for the comparison with CVA. Section 4 will also discuss whether EVA functions as a Value Based Management concept (which is its objective) or just another version of accounting. Section 5 will discuss the alleged necessity, for technical reasons, of basing a Value Based Management tool on accounting which EVA does, contra the possibility of basing it directly on Cash Flow which CVA does. Section 6 further compares EVA to CVA and it discusses the final cor-rections that are necessary to eventually have EVA become a concept that simulates cash flow. Sec-tion 7 will discuss the Market Value Added concept, and then we have the conclusion in section 8. In Appendix 1 I will discuss a company's concept of value from the shareholders' perspective. All figures, graphs and tables in the paper are my own.

I will leave out some interesting aspects in order to keep this paper a paper and not a book, e.g. the problems that we find in accounting's consolidation of multinational corporations, i.e. consolidation effects from inflation and currency effects, which also influence the quality of EVA.

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Corporate Governance, Accounting Outcomes, and Organizational Performance

Written by Paula Widiastuti, SE, MSM on 8/26/2008

The empirical research examining the association between typical measures of corporate governance and various accounting and economic outcomes has not produced a consistent set of results. We believe that these mixed results are partially attributable to the difficulty in generating reliable and valid measures for the complex construct that is termed “corporate governance.” Using a sample of 2,106 firms and 39 structural measures of corporate governance (e.g., board characteristics, stock ownership, institutional ownership, activist stock ownership, existence of debt-holders, mix of executive compensation, and anti-takeover variables), our exploratory principal component analysis suggests that there are 14 dimensions to corporate governance. We find that these indices have a mixed association with abnormal accruals, little relation to accounting restatements, but some ability to explain future operating performance and future excess stock returns.

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A Comparison of Dividend, Cash Flow and Earnings Approaches to Equity Valution

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Stephen H. Penman and Theodore Sougiannis

Standard formulas for valuing equities require prediction of payoffs "to infinity" for going concerns but a practical analysis requires that they be predicted over finite horizons. This truncation inevitably involves (often troublesome) "terminal value" calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when applied to a finite-horizon valuation. Valuations based on average ex post payoffs over various horizons, with and without terminal value calculations, are compared with (ex ante) market prices to give an indication of the error introduced by each technique in truncating the horizon. Comparisons of these errors show that accrual earnings techniques dominate free cash flow and dividend discounting approaches. Further, the relevant accounting features of each technique are identified and the source of the accounting that makes it less than ideal for finite horizon analysis (and for which it requires a correction) are discovered. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined.

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Information Risk and the Cost of Debt Capital

Written by Paula Widiastuti, SE, MSM on 8/26/2008

by. Sattar A. Mansi, William F. Maxwell and Darius P. Miller

We test whether forecast dispersion is related to the uncertainty of economic fundamentals by exploiting the unique attributes of the corporate bond market. We find strong evidence that forecast dispersion is positively priced in corporate bond yields. We also provide evidence that other firm specific information measures, such as the level of idiosyncratic risk, analyst following, forecast bias,
ownership structure, probability of informed trading (PIN), executive compensation, age, size, and accounting disclosures impact the spread on corporate bonds, but do not subsume the effect of dispersion. Our results are consistent with the hypothesis that the dispersion of analysts’ forecasts represents a forward looking measure of information risk that is priced in financial markets.

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Day of The Week Effect and Market Efficiency

Written by Paula Widiastuti, SE, MSM on 8/26/2008

DAY OF THE WEEK EFFECT AND MARKET EFFICIENCY – EVIDENCE FROM INDIAN EQUITY MARKET USING HIGH FREQUENCY DATA OF NATIONAL STOCK EXCHANGE
by Golaka C Nath & Manoj Dalvi

The present study examines empirically the day of the week effect anomaly in the Indian equity market for the period from 1999 to 2003 using both high frequency and end of day data for the benchmark Indian equity market index S&P CNX NIFTY. Using robust regression with biweights and dummy variables, the study finds that before introduction of rolling settlement in January 2002, Monday and Friday were significant days. However after the introduction of the rolling settlement, Friday has become significant. This also indicates that Fridays, being the last days of the weeks have become significant after rolling settlement. Mondays were found to have higher standard deviations followed by Fridays. The existence of market inefficiency is clear. The market inefficiency still exists and market is yet to price the risk appropriately.

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