Journal of Modelling in Management

How is new information capitalized in asset values? The role of kurtosis : Table of Contents

José Guedes, João M. Andrade e Silva — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to further understanding of how new information impacts the market value of financial assets. Design/methodology/approach – The paper uses a Bayesian approach to asset valuation, whereby investors use signals conveyed by new information to update their estimate of a structural valuation parameter. The underlying distributions – i.e. the distribution of the information signal and the prior distribution of the valuation parameter – are allowed to exhibit a degree of kurtosis greater than that of the normal distribution. Findings – The revision in asset value as a function of the realization of the information signal is an S-shaped function (in the local region centred on the zero-surprise level of the signal), if the distribution of the information signal features excess kurtosis; conversely, if the prior of the valuation parameter features excess kurtosis, the revision in asset value is an inverted S-shaped function. Research limitations/implications – The paper generates clear implications with respect to the shape of the function relating the revision in asset value to the realization of the signal only in the local region centred on the zero-surprise level of the signal. Practical implications – The paper helps to shed light on the well-known empirical result that the stock price reaction to earnings' announcements is an S-shaped function, centred on the zero-surprise level of reported earnings. Originality/value – In the financial accounting literature, the paper helps one to understand the role of the distributional assumptions underlying the stock price reaction to earnings' announcements, namely, the role of excess kurtosis both in reported earnings and in the prior of means earnings.

Multi-factor competitive internet strategy evaluation: search expansion, portal synergies : Table of Contents

Dean A. Paxson, Arun Melmane — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to illustrate the use of a multi-factor competitive real option model. Design/methodology/approach – The model is described, context of Google-Yahoo! is developed, market share and other parameter values are estimated, sensitivities and alternative model specifications are shown, and model results are compared with accounting and also stock market valuations and conclusion emphasizes the need for further empirical and theoretical research. Findings – It was found that applications are feasible, but estimated parameter values are likely to be very approximate compared with internal company information. Hence it points to use as managerial decision tool. Research limitations/implications – Some limitations are the assumed duopoly model, and that historical data are adequate proxies for expected revenue, investment cost, volatilities and market share. The basic model assumes geometric Brownian motion, but the possible consequences of other stochastic processes are illustrated. Practical implications – Internal market share information should be compared with public data in making strategic investment decisions. Originality/value – Model adaptation and empirical application are unique, and of value to future empirical researchers, including stock market analysts as well as corporate decision makers.

Modelling traditional accounting and modern value-based performance measures to explain stock market returns in the Athens Stock Exchange (ASE) : Table of Contents

Dimitrios I. Maditinos, Željko Ševic, Nikolaos G. Theriou — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to investigate the explanatory power of two value-based performance measurement models, Economic Value Added (EVA®) and shareholder value added (SVA), compared with three traditional accounting performance measures: earnings per share (EPS), return on investment (ROI), and return on equity (ROE), in explaining stock market returns in the Athens Stock Exchange (ASE). Design/methodology/approach – The paper uses the Easton and Harris formal valuation model and employs both a relative and an incremental information content approach to examine which performance measure best explains stock market returns; and the explanatory power of the pairwise combinations of one value-based performance measurement model and one traditional accounting performance measure in explaining stock market returns. For this purpose, pooled time-series, cross-sectional data of listed companies in the Athens Stock Exchange (ASE) over the period 1992-2001 have been collected and modelled. Findings – Relative information content tests reveal that stock market returns are more closely associated with EPS than with EVA® or other performance measures. However, incremental information content tests suggest that the pairwise combination of EVA® with EPS increases significantly the explanatory power in explaining stock market returns. Practical implications – The results suggest that the market participants in the Greek stock market should pay additional attention to EVA® but they should also consider other determinants to develop their investment strategies. Originality/value – The paper is one of the first studies on the value relevance of traditional accounting (EPS, ROI, and ROE) and value-based (EVA® and SVA) performance measures in explaining stock market returns in the ASE. The results extend the understanding of the role of EVA® and SVA in explaining stock market returns in the ASE, and, moreover, whether they may affect investors' decisions in a continental European market with market characteristics similar to that of Greece.

On the value of European options on a stock paying a discrete dividend : Table of Contents

João Amaro de Matos, Rui Dilão, Bruno Ferreira — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to present an arbitrarily accurate approximation for the value of European options written on a Black-Scholes stock paying a discrete dividend. Design/methodology/approach – The proposed method is a computational method for the analytical solution of the problem. Findings – It was found that the proposed method is computationally faster than any other exact computational available method, including Monte-Carlo simulations. Research limitations/implications – The method is applied for a single dividend payment, but can be extended for several payments. The exact amount of the dividend must be known ex-ante, as well as the precise date of payment. Practical implications – The paper provides the most efficient way to compute with absolute precision the value of European options on dividend-paying assets, under the Black-Scholes assumption. Originality/value – The computing time in the approach is several orders of magnitude faster than with traditional Monte Carlo methods, for the same desired accuracy.

An application of returns-based style analysis to investigating the disappearance of the size premium : Table of Contents

Julia Sawicki — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this study is to investigate explanations for the behaviour of the size premium using measures of large and small stock holdings of mutual funds. Design/methodology/approach – Returns-based style analysis is used to measure asset class exposure by regressing equity fund returns on asset class returns over the period 1965 to 2003. The coefficients estimate portfolio asset allocation indicating a fund's investment styles. The estimates from 36-month rolling regressions of US equity fund returns on various asset classes are aggregated and used as measures of investors' exposure to small stocks. The patterns are analyzed in the context of the behaviour of the abnormal returns to small stocks. Findings – The results indicate the importance of the 1974-1975 bear market to the historical size premium and support an overreaction and reversal argument. Exposure to small stocks drops dramatically between 1975 and 1977, suggesting a sell-off of small stocks. Fund exposure subsequently increases rapidly to its highest levels between 1982 and the market crash of 1987. These patterns are consistent with pricing pressure that would lead to the initial undervaluation and subsequent overvaluation driving returns to small stocks over this period. Originality/value – The study introduces the application of the returns-based style analysis methodology to studying an asset-pricing phenomenon and demonstrates important insights that can be obtained from the use of this methodology in new contexts and at an aggregate level.