Corporate Finance

Obtaining more accurate equity value estimates is the starting point for stock selection, value-based indexing in a noisy market, and beating benchmark indices through tactical style rotation. Unfortunately, discounted cash flow, method of comparables, and fundamental analysis typically yield discrepant valuation estimates. Moreover, the valuation estimates typically disagree with market price. Can one form a superior valuation estimate by averaging over the individual estimates, including market price?

This paper compares centralized and decentralized price setting by a firm that sells a single product in two markets, but is constrained to set one price (e.g., due to arbitrage). Each market is characterized by a different linear demand function, and demand conditions are privately observed by a local manager. This manager only cares about profits in his own market and, as a result, communicates his information strategically. Our main results link organizational design to market demand.

We are currently experiencing a major shock to the financial system, initiated by problems in the subprime mortgage market, which spread to securitization products and credit markets more generally. Banks are being asked to increase the amount of risk that they absorb (by moving off-balance sheet assets onto their balance sheets), but losses that the banks have suffered limit their capacity to absorb those risky assets.

Bekaert and Hodrick equip future business leaders with the analytical tools they need to make sound financial decisions in the face of a competitive global environment. For undergraduate and graduate students enrolled in an international finance course.

Under U.S. GAAP, reported balance sheet and income statements are based on immediate expensing of R&D expenditures. We capitalize those expenditures and derive adjusted equity book values and earnings using simple amortization techniques (straight-line over assumed industry-specific useful lives). After confirming that such adjustments increase the association of book values/earnings with contemporaneous stock prices (and future earnings), we examine the relation between those adjustments and future returns.

An impressive set of scholars and practitioners bring together in this volume recent practical innovations and policy questions in the field of microfinance. The authors address integration of capital markets with microfinance, technological innovations such as the use of mobile phone technology, the consequences of gender empowerment (particularly on micro-loan borrowings), and the regulatory challenges and opportunities emerging as the landscape of microfinance dramatically evolves.

In this paper, we discuss earnings quality and the related concept of earnings management, focusing on the primary financial accounts. For each key line-item from the financial statements, we summarize accounting and economic considerations applicable to that item, discuss implications for earnings quality, evaluate the susceptibility of the item to manipulation, and identify potential red flags. The red flags and specific issues discussed for the individual line-items provide a framework for fundamental and contextual analysis by academic researchers and practitioners.

Walgreen Company completed new five-year financial projections in preparation for the succession of Daniel Jorndt, senior vice president of finance and company treasurer, to the presidency of the company. Joanna Doode, Jorndt's assistant, had been requested by Jorndt to consider specifically whether the company's projected dividend path was appropriate in light of Walgreens' changing circumstances. Did Walgreens' expected surge in cash flow necessitate that its cash distribution policy be more dramatically overhauled?

Volatility is the key variable in option pricing models and for risk management in general. Not surprisingly, this has led to the recognition that volatility uncertainty is an important risk factor. This realization, in turn, has given rise to derivative instruments tied to volatility, such as variance swaps, volatility swaps, and options on both variance and volatility, which are specifically designed to help manage this risk. To price these contracts, a model is needed for the volatility process.