Valuing high technology growth firms

For the valuation of fast growing innovative firms Schwartz and Moon (2000, 2001) develop a fundamentals based valuation model where key parameters, such as revenues and expenses, follow stochastic processes. Guided by economic theory, this paper tests this model on a sample of around 30,000 technology firm quarter observations from 1992 to 2009 using realized accounting data and benchmark it against the traditional Enterprise Value-Sales Multiple. Our results show that the Schwartz-Moon model is on average nearly as accurate as the multiple approach, while it is even more accurate in certain industries such as pharmaceutical and computer firms. Most importantly, the Schwartz-Moon model shows the ability to indicate severe market over- or undervaluation.Schwartz-Moon model, market mispricing, empirical test, company valuation

Extended dividend, cash flow and residual income valuation models: Accounting for deviations from ideal conditions

Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital. --Dirty Surplus,Terminal Value,Steady-State,Valuation Error

Bank funding stability, pricing strategies and the guidance of depositors

Banks face a 'behavioralization' of their balance sheets since deposit funding increasingly consists of nonmaturing deposits with uncertain cash flows exposing them to asset liability (ALM) risk. Thus, this study examines the behavior of banks' retail customers regarding non-maturing deposits. Our unique sample comprises the contract and cash flow data for 2.2 million individual contracts from 1991 to 2010. We find that contractual rewards, i.e., qualified interest payments, and government subsidies, effectively stabilize saving behavior and thus bank funding. The probability of an early deposit withdrawal decreases by approximately 40%, and cash flow volatility drops by about 25%. Our findings provide important insights for banks using pricing incentives to steer desired saving patterns for their non-maturing deposit portfolios. Finally, these results are informative regarding the bank liquidity regulations (Basel III) concerning the stability of deposits and the minimum requirements for risk management (European Commission DIRECTIVE 2006/48/EC). (C) 2014 Elsevier B.V. All rights reserved