Drivers to Equity Valuation: Perpetuities or Annuities Approach? An Application to the main European Stock Markets

Academics and practitioners have been applying equity valuation methods mainly based on discount cash flow models, residual income models or dividend discount models combined with balance sheet and income statement multiples of market comparables to analyse share price and to provide price targets for investors or even base for transactions such as mergers and acquisitions (M&A). Most of those methods rely on mathematical deductions of growing or constant perpetuities or near perpetuities (such as annuities) to attain market values. However, it is of the outmost relevance for valuation to verify how the theoretical models relate with real values and what is its relationship with companies’ firm past age. Beyond stating a non-linear relationship for valuation models and ascertain important valuation drivers, using a sample of more than 3400 European companies with cross section data, this paper contributes to the improvement of valuation model’s effectiveness by inducing non-explicit period valuation modifications to long term annuities and perpetuities considering class age intervals. This paper’s originality is supported by the study of the relation of past company age with predicted annuities, the proof of non-compliance of perpetuity-based valuation models and the contribution with new value drivers for valuation purposes. &nbsp

A behavioural approach to corporate finance: A study of the Egyptian and UK markets

This thesis empirically investigates the effect of managerial overconfidence bias on investment decisions, stock price crash risk and default risk. Overconfidence is manifested in an exaggerated sense of being attentive only to one’s own information, believing that they are better than the average person, and an inflated belief in their ability to control events. Following recent theoretical work, I propose three models. My first model proposes that overconfident managers overinvest when they have abundant internal funds or riskless debt but restrict investment when forced to issue equity or take on risky debt to raise funds. In the second model, I expect managerial overconfidence increases bad news hoarding, leading to increased stock price crash risk. The third model predicts that overconfident managers engage in exaggerated risk-taking activities, increasing the risk of default. Empirical testing is applied on all listed firms in the Egyptian and the UK market. The overconfidence measures are insignificant for Egypt across all three models. For the UK, the following results are found. In the first model, investment of overconfident managers is significantly more responsive to cashflow, particularly in firms that are financially constrained. In the second model, I find that managerial overconfidence does lead to an increase in stock price crash risk. In the third model, I find that, contrary to the hypothesis, there is a significant negative relationship between managerial overconfidence and default risk. The results are then linked to existing empirical evidence and several conclusions are drawn, particularly in relation to manager overconfidence in developing countries

Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading

Uncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter invest-ments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon “dirty” technology to a low-carbon “clean” technology. Using Monte Carlo simulation and dynamic programming techniques for real market data, we determine the optimal CO2 price floor level and growth rate in order to induce investments into the low-carbon technology. We show these findings to be robust to a large variety of input parameter settings.Carbon price, price floor, technological change, investment decision, real option approach

The relationship between capital structure and corporate governance in a UK context

The extensive research in the field of capital structure provides a starting point to build upon within this research, to re-examine the relationship between capital structure and corporate governance for the period 2003-2012 for FTSE 350 companies. Previously investigated independent variables will be re-examined in the UK context, for example, gender of the CEO and the Board of Directors, size of the board, number of board meetings, board meeting attendance and managerial ownership. Previously, the focus has been on the relationship between the determinants and company performance. Prior studies focus on the use of single equation modelling (Berger et al., 1997; Fosberg, 2004; Malmendier et al., 2011; Ahern and Dittmar, 2012; Yim, 2013). The contribution of this study is three fold. Firstly, the use of both single and dynamic modelling allows for a more detailed analysis of the potential determinants on capital structure to emerge. Secondly, the use of several definitions of gearing enables a study into whether the duration of debt is one attribute in the capital structure puzzle. Thirdly, the use of comprehensive corporate governance factors including board structure, CEO characteristics, and ownership structure enable a wider number of independent variables to be included within the capital structure debate. In relation to CEO age the study finds evidence that CEOs are demonstrating a difference in risk levels between short-term and long-term debt levels, with older CEOs being at risk of entrenchment. As the tenure period of the CEO increases the level of debt decreases, in line with managerial entrenchment theory. In relation to board characteristics; the size of the board, level of independence and meeting attendance, lead to a reduction in the uptake of debt. The number of board meetings is found to have a positive impact on the leverage levels; the increase in the time available to discuss options is found to have the opposite effect on debt levels. Differences have become apparent in this study between the relationship with key corporate governance variables, and the length of time that debt is taken out. In the case of the variable duality, levels of short-term debt increase, while long-term debt decreases. A negative relationship is identified between the proportion of compensation received by the CEO and leverage levels

THREE ESSAYS ON FIRM AND MANAGERIAL PERFORMANCE

The three essays of this dissertation examine managerial actions and strategies in response to firm-specific situations, and the resulting firm and managerial performance. Essay 1 disentangles managerial ability and firm efficiency and examines managerial ability conditional on firm efficiency. Prior research on managerial ability overlook under- lying firm efficiency. Observing that the two measures of quality are highly correlated, I disentangle managerial ability from firm efficiency and create new measures for innate (pure) managerial ability and relative managerial ability (conditional on firm efficiency). I categorize managers as underrated (high managerial ability, low firm efficiency), typical (managerial ability and firm efficiency at par), and overrated (low managerial ability, high firm efficiency), and examine the consequent corporate strategies, firm performance and CEO compensation. Overrated managers inherit (i.e., are in charge of) dynamic firms but adopt conservative strategies themselves; the opposite is true for underrated managers. Overrated managers elicit negative firm performance while underrated managers engender positive firm performance. In contrast, overrated managers are overcompensated and underrated man- agers are undercompensated; innate (pure) managerial ability, by itself, has no bearing upon compensation. These results indicate the importance of disentangling managerial ability from firm efficiency to better understand the relevance of corporate quality towards corporate strategies, firm performance and CEO compensation. It may be inferred that managerial ability, per se, is likely a hype. Essay 2 studies the impact of non-compete clause enforcement on firm performance and employees. Existing literature on non-compete clauses (NCCs) focuses on the effect on firm characteristics other than performance, and the effect on top executives rather than general employees. My research examines the effect of NCC enforcement on firm performance and general employees. For the full sample of firms NCC enforcement has a non-significant relation to firm financial performance, a positive, significant relation to firm operating performance, and a negative, significant relation to employee metrics (total employees, total employee expense and average wage). The results, however, change drastically for subsam- ples: firms with low versus high performance, and firms with weak versus strong policies. NCC enforcement has a positive (negative), significant relation to firm financial performance for firms with low (high) financial performance and a nonsignificant (negative) relation to firm financial performance for firms with weak (strong) corporate governance with mixed effects of NCC enforcement on operating performance. Taken together my findings provide initial evidence that NCC enforcement has a beneficial effect on the worst firms, a detrimental effect on the best firms, and a detrimental effect on employees overall. Essay 3 looks into the behavior of firm managers in response to success and distress. I examine prospect theory in the context of corporate decision making: how firm managers change corporate strategies in response to firm-specific success and firm-specific distress. Based on these changes in corporate strategies I categorize the behavioral disposition of managers as house money effect, status quo effect, conservatism effect, trying-to-break-even effect, status quo effect, and snake bite effect; and examine the subsequent firm performance of each group. Managers are more risk-avoiding if the intensity (duration) of success is higher (longer); managers are more risk-taking if the intensity (duration) of distress is higher (longer). Following success, house money effect managers have the smallest decrease in firm performance while conservative managers have the largest; following distress, trying-to- break-even managers have the largest increase in firm performance while snake bite effect managers had the largest decrease in firm performance. In addition, younger (smaller) firms are more risk-taking following distress (following success and distress) and firms with payout are more risk-avoiding following both success and distress. Younger (shorter tenured) CEO\u27s are also more risk-taking following distress (following success and distress) and female CEO\u27s are more risk-taking following distress. Overall, this paper provide supports for prospect theory in a corporate finance decision-making setting: firm managers have very different risk behaviors following gains (success) and distress (losses); and the risk attitude depends on the intensity and duration of success/distress. In addition, following either success or distress, risk-taking managers are rewarded with higher subsequent firm performance while risk-avoiding managers are punished with lower subsequent firm performance

Family Ownership and Corporate Environmental Responsibility: The Contingent Effect of Venture Capital and Institutional Environment

As scholars and policy makers pay more attention to the environmental impact of economic activities, more focus has been placed on the corporate environmental responsibility (CER) of family firms, which accounts for the majority of businesses in both developed and developing countries. Using a sample of 4714 private enterprises across 23 provinces in China, the current study examines the effect of family ownership on CER investment, as well as the moderating effects of venture capital investment and local institutional development. Results show that concentrated family ownership leads to lower CER spending, however, when venture capital investment comes from developed markets, the negative relationship is reversed. In addition, the marketization level of the province in which a family firm is headquartered mitigates the negative relationship between family ownership and CER investment

THE ROLE OF THE BRAND: EXAMINATION OF THE EFFECT OF A BRAND CHANGE ON FINANCIAL PERFORMANCE OF ELEVEN SOUTH AFRICAN RETAILERS

Has the role of the brand eroded to the point where it no longer influences the customer’s choice or the retailer’s financial performance? Does the brand have little to no relevance to either the customer or the company, to the extent that even an abrupt change in a retailer’s brand will not have a detrimental effect on financial performance? The overarching hypothesis of this research is that in contemporary multi-category mass-market retailing, the retailer brand has little to no effect on a retailer’s financial performance but that the dimensions of the retail mix are all important. This thesis argues that whilst the brand may play a role in certain retail environments, in multi-category, mass market retailing, the brand plays little to no role! The study conducted quantitative analysis, using empirical, secondary, scanner based data. The data consists of 36775 sales data points and 6 further variables for each of 987 stores across eleven multi-category mass-market South African retailers, over thirty six months (all references to 987 stores relate to a specific point in time post acquisition of the group; the average number of stores p. a. over three years of the analysis was 1021). The research used a linear mixed model, and analysis of variance to examine the effect of key dimensions of the retail mix (price, merchandise assortment, location and credit offer) on sales performance, and to examine the effect of different levels of each dimension on sales performance. Secondly, the research used a linear mixed model supported where relevant by paired t-tests and relative difference analysis to examine the effect on financial performance of both an abrupt change in a retailer’s brand and of a change in the retailer’s credit offer. The proposed research will investigate what happens when eleven established dominant brands are abruptly consolidated into five. The research will further investigate the short and long term effect of a change in the credit offer which improves affordability

Patrones comunes de fracaso y reorganización por sector y país para las PYMEs de seis países europeos utilizando PDFR

This study contributes to identifying common distress patterns in financial indicators by sector and country in Finland, France, Germany, Italy, Portugal, and Spain as well as ex-post signals of reorganization success. We use PDFR that provides a distance-to-failure measure and allows us to track the behavior of different features of the firm proxied by accounting ratios. Our results show that indicators of financial structure, followed by working capital, profitability on assets, margin over sales and cash flow to assets, are the most discriminant variables of failed SMEs across all sectors and countries analyzed. By contrast, during reorganization, return on assets and its components are the main initial drivers of recovery, whereas the financial structure factors show a progressive but slow recovery. Boosting and Z-scores are used for robustness.Este estudio contribuye a la identificación de patrones comunes de fracaso en indicadores financieros por sector y país en Alemania, España, Finlandia, Francia, Italia y Portugal, así como a la identificación de patrones comunes de éxito en la reorganización. Utilizamos PDFR, que proporciona una medida de distancia al fracaso y permite hacer un seguimiento de la evolución de la empresa a través de sus ratios contables. Nuestros resultados muestran que los indicadores de estructura financiera, seguidos de fondo de maniobra, rentabilidad sobre activos, margen sobre ventas y *cashflow* sobre activos, son las variables más discriminantes de las pymes clasificadas como fracasadas, en todos los sectores y países analizados. En contraste, durante la reorganización, la rentabilidad sobre activos y sus componentes son los principales inductores iniciales de la recuperación, mientras que los indicadores de estructura financiera muestran una progresiva pero lenta recuperación. Se utilizan Boosting y Z-score como medidas de robustez

Patrones comunes de fracaso y reorganización por sector y país para las PYMEs de seis países europeos utilizando PDFR

This study contributes to identifying common distress patterns in financial indicators by sector and country in Finland, France, Germany, Italy, Portugal, and Spain as well as ex-post signals of reorganization success. We use PDFR that provides a distance-to-failure measure and allows us to track the behavior of different features of the firm proxied by accounting ratios. Our results show that indicators of financial structure, followed by working capital, profitability on assets, margin over sales and cash flow to assets, are the most discriminant variables of failed SMEs across all sectors and countries analyzed. By contrast, during reorganization, return on assets and its components are the main initial drivers of recovery, whereas the financial structure factors show a progressive but slow recovery. Boosting and Z-scores are used for robustness.Este estudio contribuye a la identificación de patrones comunes de fracaso en indicadores financieros por sector y país en Alemania, España, Finlandia, Francia, Italia y Portugal, así como a la identificación de patrones comunes de éxito en la reorganización. Utilizamos PDFR, que proporciona una medida de distancia al fracaso y permite hacer un seguimiento de la evolución de la empresa a través de sus ratios contables. Nuestros resultados muestran que los indicadores de estructura financiera, seguidos de fondo de maniobra, rentabilidad sobre activos, margen sobre ventas y cashflow sobre activos, son las variables más discriminantes de las pymes clasificadas como fracasadas, en todos los sectores y países analizados. En contraste, durante la reorganización, la rentabilidad sobre activos y sus componentes son los principales inductores iniciales de la recuperación, mientras que los indicadores de estructura financiera muestran una progresiva pero lenta recuperación. Se utilizan Boosting y Z-score como medidas de robustez.©2023 ASEPUC. Published by EDITUM - Universidad de Murcia. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).fi=vertaisarvioitu|en=peerReviewed