Earnings Yield As a Predictor of Return on Assets, Return on Equity, Economic Value Added and the Equity Multiplier
Total Page:16
File Type:pdf, Size:1020Kb
Load more
Recommended publications
-
Portfolio Construction + Management with Factset
www.factset.com Truly Active Management Requires a Commitment to Excellence: PORTFOLIO CONSTRUCTION + MANAGEMENT WITH FACTSET Bijan Beheshti, John Guerard, and Chris Mercs Truly Active Management Requires a Commitment to Excellence: Portfolio Construction and Management with FactSet1 Bijan Beheshti FactSet Research Systems Inc. San Francisco, CA John Guerard McKinley Capital Management, LLC Anchorage, AK 99503 ([email protected]) and Chris Mercs FactSet Research Systems Inc. San Francisco, CA February 2020 This paper is forthcoming in John Guerard and William T. Ziemba, Editors, Handbook of Applied Investment Research (Singapore: World Scientific Publishing, 2020). 1 The authors thank Ross Sharp, formerly of FactSet, who created the R-robust regression script. Truly Active Management Requires a Commitment to Excellence: Portfolio Construction and Management with FactSet Financial anomalies have been studied in the U.S. and recent evidence suggests that they have diminished in the U.S. and possibly in non-U.S. portfolios. Have the anomalies changed and are they persistent? Have historical and earnings forecasting data been a consistent and highly statistically significant source of excess returns? We test many financial anomalies of the 1980s-1990s and report that several models and strategies continue to produce statistically significant excess returns. We also test a large set of U.S. and global variables over the past 16 years and report that many of these fundamental, earnings forecasts, revisions, breadth and momentum, and cash deployment strategies maintained their statistical significance during the 2003-2018 time period. Moreover, the earnings forecasting model and robust regression estimated composite model excess returns are greater in Non-U.S. -
Equity-Bond Yield Correlation and the FED Model: Evidence of Switching Behaviour from the G7 Markets
This is a post-peer-review, pre-copyedit version of an article published in Journal of Asset Management. The final authenticated version is available online at: https://doi.org/10.1057/s41260- 018-0091-x Equity-Bond Yield Correlation and the FED Model: Evidence of Switching Behaviour from the G7 Markets February 2018 Revised April 2018 This Version June 2018 Abstract This paper considers how the strength and nature of the relation between the equity and bond yield varies with the level of the real bond yield. We demonstrate that at low levels of the real bond yield, the correlation between the equity and bond yields turns negative. This arises as the lower bond yield implies heightened macroeconomic risk (e.g., deflation and economic stagnation) and causes equity and bond prices to move in opposite directions. The FED model relies on a positive relation for its success in predicting future returns. Thus, we argue that the mixed empirical evidence regarding the FED model arises due to this switch in correlation behaviour. We present supportive evidence for the switching relation and its link to the level of the bond yield using linear and non-linear smooth transition panel regression techniques for the G7 markets. The results presented here should be of interest to market practitioners who may wish to use the FED model to aid market timing decisions and for academics interested in understanding the interrelations between markets. Keywords: Equity Returns, Bond Returns, Correlation, Bond Yield, Switching JEL: C22, C23, E44, G12, G15 1 1. Introduction. The FED model implies a positive relation between the equity and bond yields. -
Equity Valuation Using Multiples: an Empirical Investigation
Equity Valuation Using Multiples: An Empirical Investigation DISSERTATION of the University of St.Gallen Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor of Business Administration submitted by Andreas Schreiner from Austria Approved on the application of Prof. Dr. Klaus Spremann and Prof. Dr. Thomas Berndt Dissertation no. 3313 Deutscher Universitäts-Verlag, Wiesbaden 2007 The University of St. Gallen, Graduate School of Business Administration, Eco- nomics, Law and Social Sciences (HSG) hereby consents to the printing of the pre- sent dissertation, without hereby expressing any opinion on the views herein ex- pressed. St. Gallen, January 22, 2007 The President: Prof. Ernst Mohr, Ph.D. Foreword Accounting-based market multiples are the most common technique in equity valuation. Multiples are used in research reports and stock recommendations of both buy-side and sell-side analysts, in fairness opinions and pitch books of investment bankers, or at road shows of firms seeking an IPO. Even in cases where the value of a corporation is primarily determined with discounted cash flow, multiples such as P/E or market-to-book play the important role of providing a second opinion. Mul- tiples thus form an important basis of investment and transaction decisions of vari- ous types of investors including corporate executives, hedge funds, institutional in- vestors, private equity firms, and also private investors. In spite of their prevalent usage in practice, not so much theoretical back- ground is provided to guide the practical application of multiples. The literature on corporate valuation gives only sparse evidence on how to apply multiples or on why individual multiples or comparable firms should be selected in a particular context. -
The Effect of Changes in Return on Assets, Return on Equity, and Economic Value Added to the Stock Price Changes and Its Impact on Earnings Per Share
Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.6, 2015 The Effect of Changes in Return on Assets, Return on Equity, and Economic Value Added to the Stock Price Changes and Its Impact on Earnings Per Share Dyah Purnamasari Lecturer of Widyatama University Bandung & Doctoral Students of Management Department, Faculty of Economics and Business, Pansudan University, Bandung, Indonesia 1. Introduction Along with the development of economic globalization are experiencing rapid change and development, the reality show that will affect the development of the business world. Competition between firms regional, national, and international heavier. Companies are required to be able to withstand competition in the continuity of the wheels of business. Companies are not only to be able to compete in the trade market, but also in the capital markets. The capital market is a means to make investments that allow investors to diversify investments, forming a portfolio according to the risk they were willing to bear the expected profit rate. Investments in securities are also liquid (easily changed), therefore it is important for the company always pay attention to the interests of the owners of capital by way of maximizing the value of the company, because the value of the company is a measure of the success of the operations are financial functions. Capital markets and securities industry is one of the indicators to assess a country's economy going well or not. This is due to the company in the stock market are large companies and credible in the country concerned, so if there is a decrease in the performance of the stock market can be said to have occurred also a decline in the performance of the real sector (Sutrisno, 2001). -
The Predictive Ability of the Bond-Stock Earnings Yield Differential Model
The Predictive Ability of the Bond-Stock Earnings Yield Differential Model KLAUS BERGE,GIORGIO CONSIGLI, AND WILLIAM T. ZIEMBA FORMAT ANY IN KLAUS BERGE he Federal Reserve (Fed) model prices and stock indices has been studied by is a financial controller provides a framework for discussing Campbell [1987, 1990, 1993]; Campbell and for Allianz SE in Munich, stock market over- and undervalu- Shiller [1988]; Campbell and Yogo [2006]; Germany. [email protected] ation. It was introduced by market Fama and French [1988a, 1989]; Goetzmann Tpractitioners after Alan Greenspan’s speech on and Ibbotson [2006]; Jacobs and Levy [1988]; GIORGIO CONSIGLI the market’s irrational exuberance in ARTICLELakonishok, Schleifer, and Vishny [1994]; Polk, is an associate professor in November 1996 as an attempt to understand Thompson, and Vuolteenaho [2006], and the Department of Mathe- and predict variations in the equity risk pre- Ziemba and Schwartz [1991, 2000]. matics, Statistics, and Com- mium (ERP). The model relates the yield on The Fed model has been successful in puter Science at the THIS University of Bergamo stocks (measured by the ratio of earnings to predicting market turns, but in spite of its in Bergamo, Italy. stock prices) to the yield on nominal Treasury empirical success and simplicity, the model has [email protected] bonds. The theory behind the Fed model is been criticized. First, it does not consider the that an optimal asset allocation between stocks role played by time-varying risk premiums in WILLIAM T. Z IEMBA and bonds is related to their relative yields and the portfolio selection process, yet it does con- is Alumni Professor of Financial Modeling and when the bond yield is too high, a market sider a risk-free government interest rate as the Stochastic Optimization, adjustment is needed resulting in a shift out of discount factor of future earnings. -
The Impact of Earning Per Share and Return on Equity on Stock Price
SA ymTsuHltRifaeEcvetePIdMhreavirePwmjoA2ur0nCa2l Ti0n;t1hOe1fi(eF6ld)o:Ef1ph2Aa8rmR5a-cNy12I8N9 G PER SHARE AND RETURN ON EQUITY ON STOCK PRICE a JaDajeapnagrtBmaednrtuozfaAmcacnounting, Faculty of Economics and Business, Siliwangi University of Tasikmalaya [email protected] ABSTRACT Research conducted to determine the effect of Earning Per Share and Return on Equity on Stock Prices, a survey on the Nikkei 225 Index of issuers in 2018 on the Japan Stock Exchange. the number of issuers in this study was 57 issuers. The data taken is the 2018 financial report data. Based on the results of data processing with the SPSS version 25 program shows that Earning Per Share and Return on Equity affect the Stock Price of 67.3% and partially Earning Per Share has a positive effect on Stock Prices. Furthermore, Return on Equity has a negative effect on Stock Prices. If compared to these two variables, EPS has the biggest and significant influence on stock prices, however, Return on Equity has a negative effect on stock prices Keywords: Earning Per Share, Return on Equity and Stock Price INTRODUCTION Investors will be sure that the investment can have a People who invest their money in business are interested positive impact on investors. Thus, eps is very important in the return the business is earning on that capital, for investors in measuring the success of management in therefore an important decision faced by management in managing a company. EPS can reflect the profits obtained relation to company operations is the decision on the use by the company in utilizing existing assets in the of financial resources as a source of financing for the company. -
Sustainable Growth Rate, Optimal Growth Rate, and Optimal Payout Ratio: a Joint Optimization Approach
Sustainable Growth Rate, Optimal Growth Rate, and Optimal Payout Ratio: A Joint Optimization Approach Hong-Yi Chen Rutgers University E-mail: [email protected] Manak C. Gupta Temple University E-mail: [email protected] Alice C. Lee* State Street Corp., Boston, MA, USA E-mail: [email protected] Cheng-Few Lee Rutgers University E-mail: [email protected] March 2011 * Disclaimer: Views and opinions presented in this publication are solely those of the authors and do not necessarily represent those of State Street Corporation, which is not associated in any way with this publication and accepts no liability for its contents. Sustainable Growth Rate, Optimal Growth Rate, and Optimal Payout Ratio: A Joint Optimization Approach Abstract Based upon flexibility dividend hypothesis DeAngelo and DeAngelo (2006), Blua Fuller (2008), and Lee et al. (2011) have reexamined issues of dividend policy. However, they do not investigate the joint determination of growth rate and payout ratio. The main purposes of this paper are (1) to extend Higgins’ (1977, 1981, and 2008) sustainable growth by allowing new equity issue, and (2) to derive a dynamic model which jointly optimizes growth rate and payout ratio. By allowing growth rate and number of shares outstanding simultaneously change over time, we optimize the firm value to obtain the optimal growth rate and the steady state growth rate in terms of a logistic equation. We show that the steady state growth rate can be used as the bench mark for mean reverting process of the optimal growth rate. Using comparative statics analysis, we analyze how the optimal growth rate can be affected by the time horizon, the degree of market perfection, the rate of return on equity, and the initial growth rate. -
Thinking Differently About Dividends Dividendspersp 4/25/03 1:40 PM Page 3
DividendsPersp 4/25/03 1:40 PM Page 1 Perspectives Thinking Differently About Dividends DividendsPersp 4/25/03 1:40 PM Page 3 Thinking Differently About Dividends Many senior executives view dividends as a low priority on the strategic agenda. They’re wrong. The unique set of circumstances that made dividends unfashionable during the long bull market of the 1980s and 1990s is fast disappearing. In the current economic envi- ronment, dividends are an especially impor- tant lever for generating above-average shareholder returns. That’s not to say that every company should increase its dividend yield—or even pay divi- dends at all. But every company should revisit its dividend policy. Doing so can greatly improve the strategy debate among a com- pany’s senior managers—whether they ulti- mately decide to increase the company’s dividend or not. Why Dividends Are Back in Fashion In the recent bull market, the practice of returning cash to investors through divi- dends was easy to dismiss. One familiar disin- centive was the double taxation of dividends according to U.S. tax law. Another was the fact that as executives were compensated increas- ingly through stock options, they were better off using excess cash to repurchase shares DividendsPersp 4/25/03 1:40 PM Page 4 (thus raising the value of options) rather than returning that cash to investors through dividends. Trends in the financial markets also dis- couraged dividends. With average total share- holder return (TSR) running in the high teens, a dividend yield of even 3 or 4 percent was a relatively minor contributor to achieving above-average TSR. -
Study on the Enterprise Sustainable Growth and the Leverage Mechanism
Vol. 4, No. 3 International Journal of Business and Management Study on the Enterprise Sustainable Growth and the Leverage Mechanism Rui Huang & Guiying Liu College of Industry and Commerce Administration Tianjin Polytechnic University Tianjin 300387, China E-mail: [email protected] Abstract The sustainable growth is the necessary condition for the survival and the development of the enterprise, and it is thought as the scale to measure the strength of the enterprise. In this article, we first compared the James·C·VanHorne sustainable growth model and the Robert·C·Higgins sustainable growth model, and analyzed the main mechanism of two sorts of leverage, i.e. the influencing degree of different intervals to the profits, and established the sustainable growth model based on the leverage effect, and simply validated the data. The sustainable growth model based on the leverage effect could make the investors consider the functions of two sorts of leverage, design various financial indexes suiting for the survival and development of the enterprise, reasonably invest and finance to realize the sustainable growth of the enterprise before they grasp the investment and financing situation of the enterprise. Keywords: Enterprise sustainable growth, Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL) 1. Introduction The financial idea of the sustainable growth means the actual growth of the enterprise must harmonized with its resources. The quicker growth will induce the shortage of the corporate resources and even the financial crisis or bankruptcy. And slower growth will make the corporate resources can not be effective utilized, which will also induce the survival crisis of the enterprise. -
Where's the Value in Value?
AC T I V E M A N AG E ME N T Where’s the Value in Value? MARCH 2016 Based on style indices, value investing has been cold as ice, growth has seen its hottest streak since the 1990s tech bubble and value exposure has recently hurt relative performance for many diversified portfolios. Why has growth been so dominant? Is there any value left in value? We asked the experts. Six CBIS equity sub-advisers offer their perspectives on the value/ growth divide. One of the most prominent equity market trends of the past few years is the dominance of growth-style returns over those of value. The Russell 1000 Growth Index outgained the Summary Russell 1000 Value Index by more than 900 basis points in 2015. Growth’s outperformance CBIS asked six of our active equity extends, albeit to a lesser degree, over the trailing five-year period. What’s driving the trend? sub-advisers to offer their thoughts on value’s recent weakness and What conclusions should investors draw from it? growth’s dominance. Their insights include informed perspectives on We asked the experts. Six CBIS equity sub-advisers offer their take on value’s slump and market cycles, relative valuation, what it might mean for markets and portfolios from here. Read on to see why headline style global central banking and implica- tions for portfolio strategy in 2016. indices don’t tell the whole story and why the outlook for value investors is brighter than it might seem. AJO CUIT Value Equity Quant value-specialist AJO shows how sector returns have dominated growth and value Causeway Capital Management index performance; when adjusted for sector influence, value has actually performed well. -
Lecture Note Packet 2 Relative Valuation and Private Company
Valuation: Lecture Note Packet 2" Relative Valuation and Private Company Valuation Aswath Damodaran Updated: January 2012 Aswath Damodaran 1 The Essence of relative valuation? In relative valuation, the value of an asset is compared to the values assessed by the market for similar or comparable assets. To do relative valuation then, • Need to identify comparable assets and obtain market values for these assets. • Convert these market values into standardized values, since the absolute prices cannot be compared. This process of standardizing creates price multiples. • Compare the standardized value or multiple for the asset being analyzed to the standardized values for comparable asset, controlling for any differences between the firms that might affect the multiple, to judge whether the asset is under or over valued Aswath Damodaran 2 Relative valuation is pervasive… Most valuations on Wall Street are relative valuations. • Almost 85% of equity research reports are based upon a multiple and comparables. • More than 50% of all acquisition valuations are based upon multiples. • Rules of thumb based on multiples are not only common but are often the basis for final valuation judgments. While there are more discounted cashflow valuations in consulting and corporate finance, they are often relative valuations masquerading as discounted cash flow valuations. • The objective in many discounted cashflow valuations is to back into a number that has been obtained by using a multiple. • The terminal value in a significant number of discounted cashflow valuations is estimated using a multiple. Aswath Damodaran 3 Why relative valuation? “If you think I’m crazy, you should see the guy who lives across the hall” Jerry Seinfeld talking about Kramer in a Seinfeld episode “ A little inaccuracy sometimes saves tons of explanation” H.H. -
Inflation and the Stock Market: Understanding the “Fed Model”∗
Inflation and the Stock Market: Understanding the “Fed Model”∗ Geert Bekaert† Columbia University and NBER Eric Engstrom‡ Federal Reserve Board of Governors This Draft: September 2008 JEL Classifications G12, G15, E44 Keyphrases Money illusion, Equity premium, Countercyclical risk aversion, Fed model, Inflation, Economic Uncertainty Dividend yield, Stock-Bond Correlation, Bond Yield Abstract: The so-called Fed model postulates that the dividend or earnings yield on stocks should equal the yield on nominal Treasury bonds, or at least that the two should be highly correlated. In US data there is indeed a strikingly high time series correlation between the yield on nominal bonds and the dividend yield on equities. This positive correlation is often attributed to the fact that both bond and equity yields comove strongly and positively with expected inflation. While inflation comoves with nominal bond yields for well-known reasons, the positive correlation between expected inflation and equity yields has long puzzled economists. We show that the effect is consistent with modern asset pricing theory incorporating uncertainty about real growth prospects and also habit-based risk aversion. In the US, high expected inflation has tended to coincide with periods of heightened uncertainty about real economic growth and unusually high risk aversion, both of which rationally raise equity yields. Our findings suggest that countries with a high incidence of stagflationshouldhaverelatively high correlations between bond yields and equity yields and we confirm that this is true in a panel of international data. ∗This work does not necessarily reflect the views of the Federal Reserve System or its staff. In particular, our use of the term "Fed Model" reflects only conventional parlance among finance practicioners for this common valuation model.