Stock valuation

About: Stock valuation is a research topic. Over the lifetime, 438 publications have been published within this topic receiving 48422 citations.

The Cross‐Section of Expected Stock Returns

Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.

Why Does Stock Market Volatility Change Over Time

Abstract: This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987. An important fact, previously noted by Officer (1973), is that stock return variability was unusually high during the 1929-1939 Great Depression. While aggregate leverage is significantly correlated with volatility, it explains a relatively small part of the movements in stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation, especially during the Great Depression. ESTIMATES OF THE STANDARD deviation of monthly stock returns vary from two to twenty percent per month during the 1857-1987 period. Tests for whether differences this large could be attributable to estimation error strongly reject the hypothesis of constant variance. Large changes in the ex ante volatility of market returns have important negative effects on risk-averse investors. Moreover, changes in the level of market volatility can have important effects on capital investment, consumption, and other business cycle variables. This raises the question of why stock volatility changes so much over time. Many researchers have studied movements in aggregate stock market volatility. Officer (1973) relates these changes to the volatility of macroeconomic variables. Black (1976) and Christie (1982) argue that financial leverage partly explains this phenomenon. Recently, there have been many attempts to relate changes in stock market volatility to changes in expected returns to stocks, including Merton (1980), Pindyck (1984), Poterba and Summers (1986), French, Schwert, and Stambaugh (1987), Bollerslev, Engle, and Wooldridge (1988), and Abel (1988). Mascaro and Meltzer (1983) and Lauterbach (1989) find that macroeconomic volatility is related to interest rates. Shiller (1981a,b) argues that the level of stock market volatility is too high relative to the ex post variability of dividends. In present value models such as Shiller's, a change in the volatility of either future cash flows or discount rates

Marginal Stockholder Tax Rates and the Clientele Effect

Abstract: T HE determination of marginal stockholder tax brackets is an important and unresolved issue in the economic literature. Marginal stockholder tax brackets play an important role in stock valuation models [ 1, 6, 14], in normative investment and dividend policy models [11, 16], and in descriptive capital allocation models [ 7, 8, 10, 12 ]. The purpose of this paper is to present and test a method of determining marginal stockholder tax brackets and to explore the implications of our findings for corporate investment policy, corporate dividend policy, and the assumption of market rationality. In the first section of this paper we expand upon the reasons for studying marginal stockholder tax brackets. In the next section we show how marginal stockholder tax brackets can be inferred from the ex-dividend behavior of common stock. In the third and fourth sections we compute marginal stockholder tax brackets and discuss their implications for capital theory.

Stock Valuation and Learning about Profitability

Abstract: We develop a simple approach to valuing stocks in the presence of learning about average pro¢tability.The market-to-book ratio (M/B) increases with uncertainty about average pro¢tability, especially for ¢rms that pay no dividends. M/B is predicted to decline over a ¢rm’s lifetime due to learning, with steeper decline when the ¢rm is young. These predictions are con¢rmed empirically. Data also support the predictions that younger stocks and stocks that pay no dividends have more volatile returns. Firm pro¢tability has become more volatile recently, helping explain the puzzling increase in average idiosyncratic return volatility observed over the past few decades. THE PAST TWO DECADES HAVE WITNESSED an unprecedented surge in the number of newly listed ¢rms on the major U.S. stock exchanges. According to Fama and French (2001b), over 550 new ¢rms per year appeared between the years 1980 and 2000, on average, compared to less than 150 ¢rms in the previous two decades. Some of these new ¢rms command valuations that might seem too high to be justi¢ed by reasonable assumptions about expected future pro¢tability. For example, more than 1 in 10 of all ¢rms listed between the years 1962 and 2000 are worth more than seven times their book value at the end of their year of listing, and almost 1 in 50 ¢rms is worth more than 20 times its book value. Naturally, investors attempting to value the newly listed ¢rms are confronted with substantial uncertainty about their future pro¢tability.We argue that this uncertainty contributes to the high valuations of young ¢rms, and that the resolution of this uncertainty over time tends to be accompanied by a decline in the valuation ratios. The basic idea is simple. Let B denote a ¢rm’s book equity today (at time 0) and g its constant growth rate, so the value of book equity at time T is B exp(gT ). Assuming that competition eliminates the ¢rm’s expected abnormal earnings by T, the ¢rm’s market value at T equals its book value, and the market value today is the expected book value at T discounted at some known rate r .I fg is unknown