Estimating the expected cost of equity capital using consensus forecasts

In this study, we develop a technique for estimating a firm’s expected cost of equity capital derived from analyst consensus forecasts and stock prices. Building on the work of Gebhardt/Lee/-Swaminathan (2001) and Easton/Taylor/Shroff/Sougiannis (2002), our approach allows daily estimation, using only publicly available information at that date. We then estimate the expected cost of equity capital at the market, industry and individual firm level using historical German data from 1989-2002 and examine firm characteristics which are systematically related to these estimates. Finally, we demonstrate the applicability of the concept in a contemporary case study for DaimlerChrysler and the European automobile industry

Business Value of IT Investment: The Case of a Low Cost Airline’s Website

Using the case of a low cost airline company’s website we analyze some special research questions of information technology valuation. The distinctive characteristics of this research are the ex post valuation perspective; the parallel and comparative use of accounting and business valuation approaches; and the integrated application of discounted cash flow and real option valuation. As the examined international company is a strategic user of e-technology and wants to manage and account intangible IT-assets explicitly, these specific valuation perspectives are gaining practical significance

Accounting for financial instruments: A comparison of European companies’ practices with IAS 32 and IAS 39

This paper analyses accounting for financial instruments of STOXX 50 companies and compare them to the requirements of IAS 32 and IAS 39, before IFRS are mandatory in the European Union. We use a list of 120 categories of inquiry and 370 possible responses and analyse companies’ annual reports. The results show that the majority of companies disclose the fair value amounts and methods of calculation but the information is neither clear nor objective, preventing the fair value information from being relevant and useful. We conclude that companies have a long way to go in terms of accounting and disclosure of financial instruments, namely derivatives. The mandatory adoption of more stringent standards such as the IAS 32 and IAS 39 may improve the information disclosed by companies. Doubts about the compliance degree and the usefulness of the information still remain. This paper brings new perspectives to the challenges of IAS/IFRS adoption, namely to what relates to fair value measurement.Accounting for financial instruments, Fair value accounting, International Accounting, Accounting harmonisation, IAS/IFRS, STOXX 50

Are Lower Private Equity Returns the New Normal?

U.S. private equity fundraising had its best year ever in 2015 -- raising $185 billion. But is the enthusiasm of investors warranted? Do PE buyout funds deliver outsized returns to investors and will they do so in the future? This report answers this question by reviewing the most recent empirical evidence on buyout fund performance; the answer is no. While median private equity buyout funds once beat the S&P 500, they have not done so since 2006 -- despite industry claims to the contrary

Financing the embedded value of life insurance portfolios

In May 2004 the CFO Forum harmonized the various efforts of reporting the embedded valueof life insurance companies by issuing the European Embedded Value (EEV) Principles.In this working paper a methodology is proposed to derive a maximum lending amountfrom EEV figures without much additional data requirements from the originating insurer. The approach chosen is similar to that of other financing areas, e.g. real estate finance, where first a prudent best estimate valuation is done and later risk deductions are performed in the form of applying loan to value ratios, e.g. 60-80 % of the prudent amount. Here, this prudent value is called bankable embedded value and the loan to value analysis presented leads to the maximum lending amount. The deductions proposed to arrive at a maximum lending amount are based on parameter adjustments and risk allowances for unexpected risks. There is an analogy with insurers for determining their own capital needs. The methodology proposed is based on the stress test approach which increasingly gains popularity with insurance supervisors in Europe. --European embedded value,embedded value,life insurance policies,maximum lending amount,required capital,risk analysis,risk discount rate,value reporting and analysis,value sensitivity analysis

The growth companies puzzle: can growth opportunities measures predict firm growth?

While numerous empirical studies include proxies for growth opportunities in their analyses, there is limited evidence as to the validity of the various growth proxies used. Based on a sample of 1942 firm-years for listed UK companies over the 1990-2004 period, we assess the performance of eight growth opportunities measures. Our results show that while all the growth measures show some ability to predict growth in company sales, total assets, or equity, there are substantial differences between the various models. In particular, Tobin's Q performs poorly while dividend-based measures generally perform best. However, none of the measures has any success in predicting earnings per share growth, even when controlling for mean reversion and other time-series patterns in earnings. We term this the 'growth companies puzzle'. Growth companies do grow, but they do not grow in the key dimension (earnings) theory predicts. Whether the failure of 'growth companies' to deliver superior earnings growth is attributable to increased competition, poor investments, or behavioural biases, it is still a puzzle why growth companies on average fail to deliver superior earnings growth

Shareholder Value and Auditor Independence

This Article questions the practice of framing problems concerning auditors\u27 professional responsibility inside a principal-agent paradigm. If professional independence is to be achieved, auditors cannot be enmeshed in agency relationships with the shareholders of their audit clients. As agents, the auditors by definition become subject to the principal\u27s control and cannot act independently. For the same reason, auditors\u27 duties should be neither articulated in the framework of corporate law fiduciary duty, nor conceived relationally at all. These assertions follow from an inquiry into the operative notion of the shareholder-beneficiary. The Article unpacks the notion of the shareholder and tells a particularized story about the shareholder interest. The exercise complicates the agency description, highlighting multiple and unstable shareholder demands that displace the unitary model of the shareholder usually brought to bear. This fragmented and volatile model of the shareholder provides neither a basis for articulating a coherent set of instructions respecting aggressive accounting nor for imposing conservative accounting. The Article concludes that legal positivism provides a more appropriate conceptual framework. Auditor duties should be conceived in formal rather than relational terms, with fidelity going to the rules and the system that auditors apply rather than to a client interest

Accounting practices for financial instruments. How far are Portuguese companies from IAS?

The purpose of this study is to analyse the current accounting practices for financial instruments by Portuguese companies and compare them to the measurement, recognition and disclosure requirements stipulated in IAS 32 and 39. In order to attain our objective, we drew up a list of 120 categories of inquiry and 370 possible responses that we were interested in analysing. We applied content analysis technique to 2001 listed companies’ annual reports. Our results suggest that the accounting practices for financial instruments by companies listed on the Portuguese stock exchange are very far from what IAS 32 and 39 require. This is especially observed in the measurement and recognition criteria applied to the categories of financial instruments for which the adoption of fair value is required (that is, held-for-trading and available-for-sale financial assets). In what derivative instruments are concerned, we found that the fair value measurement criterion is being adopted by a large number of derivative users. However, with respect to hedging transactions, the gap between accounting practices and the relevant accounting Standards is quite wide. A big improvement in reporting practices regarding this type of instruments will be needed. These findings throw light on the challenges of adopting IAS, particularly with respect to fair value measurement, now that 2005 is near.Financial instruments accounting, Fair Value, International Accounting, IAS, Portugal

Update: Are Lower Private Equity Returns the New Normal?

This report updates a version released in June 2016.U.S. private equity fundraising had its best year ever in 2015 -- raising $185 billion. But is the enthusiasm of investors warranted? Do PE buyout funds deliver outsized returns to investors and will they do so in the future? This report answers this question by reviewing the most recent empirical evidence on buyout fund performance; the answer is no. While median private equity buyout funds once beat the S&P 500, they have not done so since 2006 -- despite industry claims to the contrary