Financial Statement Analysis and Valuation (EBC4039)
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Summary of all papers in Financial Statement Analysis and Valuation
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Course
Financial Statement Analysis and Valuation (EBC4039)
Institution
Maastricht University (UM)
Concerns a summary of all papers covered in the Financial Statement Analysis and Valuation course of the Accounting & Control program at Maastricht University. For an overview of the papers in this summary, I refer to the table of contents on the first visible page of the summary. With the help of ...
Financial Statement Analysis and Valuation (EBC4039)
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Index
Evolution in Value Relevance of Accounting Information (Bath et al.)................................2
Do sophisticated investors follow fundamental analysis strategies? Evidence from hedge
funds and mutual funds (Wang et al.)................................................................................3
Do Digital Technology Firms Earn Excess Profits? Alternative Perspectives (Rajgopal et
al.)...................................................................................................................................... 4
Measuring Accounting Asset Informativeness (Chen et al).................................................6
The Informativeness of Balance Sheet Disaggregations: Evidence from Forecasting
Operating Assets (Noordermeer & Vorst)...........................................................................8
The Cost of Fraud Prediction Errors (Beneish et al)..........................................................10
Tail-Heaviness, Asymmetry, and Profitability Forecasting by Quantile Regression (Tian et
al)..................................................................................................................................... 11
Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis
Approach (Piotroski et al)................................................................................................. 13
Peer selection and valuation in merges and acquisitions (Eaton et al.)............................15
A Matter of Principle: Accounting Reports Convey Both Cash-Flow News and Discount-
Rate News (Penman et al.)...............................................................................................18
,Evolution in Value Relevance of Accounting Information (Bath et al.)
The question addressed in this article is how the value relevance of accounting
information evolved as the economy transitioned from primarily industrial to a “new
economy” based on services and information technology.
Prior research concludes that value relevance of accounting items, particularly earnings
(winst), has declined, attributes the decline to the rise of this new economy, and
concludes that accounting has lost its relevance.
This article expects that relevance of accounting has changed with the rise of new
economy firms with more intangible assets (as opposed to tangible assets) and more
services (as opposed to goods) and the rise of old economy loss firms (negative
earnings). Earnings are less relevant for new economy firms and old economy loss firms,
as IFRS is based on old economy profit firms.
In addition to earnings and equity book value, this article also includes:
o Intangible assets: R&D expenses, recognized intangible assets and advertising
expenses
o Growth opportunities: Cash and revenue growth
o Alternative performance measures: Operating cash flow, revenue and special
items and other comprehensive income (earnings adjusted for one-time
investments/income)
These items include aspects that IFRS struggles to include in its valuation.
This article uses the CART (Classification and Regression Trees) method instead of a
regression model, as it is unknown whether the relation is linear and whether interaction
effects exists between dependent variables.
This article evaluates the following attributes:
1. Evolution in combined value relevance:
In contrast to prior research, we find no decline in combined value
relevance of accounting items.
2. Value relevance of individual accounting items:
Consistent with prior research, we find that earnings (equity book value)
has become significantly less (more) relevant, as earnings are considered
less informative than equity book value.
As expected, we find an increase in relevance of items related to intangible
assets, growth opportunities and alternative performance measures, which
are important in the new economy.
We also find a significant increase in the number of accounting items
needed to explain the same proportion of combined value relevance,
which suggests valuations have become more nuanced.
3. New economy and old economy firms: We consider separately New Economy
(technology industry), Old Economy Profit and Old Economy Loss firms
The trends are more pronounced for, but extend beyond, New Economy
firms.
Taken together, these findings reveal an evolution to a more nuanced, but not declining,
relation between accounting information and share price.
, Do sophisticated investors follow fundamental analysis strategies? Evidence
from hedge funds and mutual funds (Wang et al.)
Using fund returns (lange termijn) and fund stockholdings (momentopname), this article
investigates whether sophisticated investors (hedge funds and mutual funds) follow
fundamental analysis strategies. Fundamental analysis evaluates which stocks may be
mispriced to figure out where to invest (short: too high vs. long: too low) to gain an
advantage over other investors.
H1: Hedge fund and mutual fund returns load positively on the long-short returns of
accounting anomalies.
This hypothesis analyses whether hedge funds and mutual funds trade on the accounting
anomaly strategy: financial irregularities from what would be considered normal. This
article expects investors to invest long on anomalies that indicate a rise in value (e.g. low
accruals) and invest short on anomalies that indicate a drop in value (e.g. high accruals).
The anomalies are sampled into the following categories: Earnings Quality, Investment,
Profitability, Profit Growth, External Financing, R&D, and Value.
This hypothesis shows that fund managers are prone to trade in the opposite direction of
what fundamental strategies prescribe.
A potential explanation relates to the agency problem: principal-agent conflict between
the fund managers and investors (clients). Two pieces of evidence that are consistent
with the agency explanation: The negative loadings are primarily driven by:
1. The short-leg of the anomalies as opposed to the long-leg of the anomalies.
2. Contrarian-like anomalies (market overreaction overvalued stocks) as opposed
to momentum-like anomalies (market under reaction undervalued stocks).
Both short-leg investments and contrarian-like anomalies indicate that fund managers
don’t short on investments that they expect to drop in value due to overvaluation. This
can be explained by the agency problem: fund managers tend to go along with market
trends, even if it’s against the prescription of the fundamental strategies, because it’s
difficult to explain to their clients that they expect a glamour stock to drop in value.
H2: Funds with higher anomaly loadings exhibit better performance.
Trading on accounting anomalies incurs significant trading costs. If the benefits of
trading on accounting anomalies outweigh the costs, this hypothesis expect hedge funds
and mutual funds that trade on accounting anomalies to perform better than those that
do not.
This hypothesis shows that funds with higher anomaly loadings perform significantly
better. This suggest that fund managers, as a group, do not systematically pursue
fundamental analysis strategies, perhaps due to agency concerns, but a subset of
managers are skilled and profit from employing such strategies.
H3: Compared to their benchmark portfolios, hedge funds and mutual funds overweight
stocks that are relatively undervalued and underweight stocks that are relatively
overvalued.
In addition to fund returns, this hypothesis also uses the stockholdings of mutual funds
and hedge funds to examine whether institutions exploit accounting anomalies.
This hypothesis finds similar results when examining the stockholdings of hedge funds
and mutual funds.
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