Fundamental Investment Analysis

This study examines the accuracy of relative valuation methods in the U.S. insurance industry, using price as a proxy for intrinsic value. The approaches differ in terms of the fundamentals used, the adjustments made to the fundamentals, the use of conditioning variables, and the selection of comparables. Selected findings include the following. First, over the last decade, book value multiples have performed significantly better than earnings multiples in valuing insurance companies.

We develop an analytically-tractable model integrating the dynamic theory of investment with dynamic optimal incentive contracting, thereby endogenizing financing constraints. Incentive contracting generates a history-dependent wedge between marginal and average q, and both vary over time as good (bad) performance relaxes (tightens) financing constraints. Financial slack, not cash flow, is the appropriate proxy for financing constraints.

The modal scientific approach in consumer research is to deduce hypotheses from existing theory about relationships between theoretic constructs, test those relationships experimentally, and then show “process” evidence via moderation and mediation. This approach has its advantages, but other styles of research also have much to offer. We distinguish among alternative research styles in terms of their philosophical orientation (theory-driven vs. phenomenon-driven) and their intended contribution (understanding a substantive phenomenon vs. building or expanding theory).

This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors.

"Much of what we experience in life results from a combination of skill and luck." — From the Introduction

The trick, of course, is figuring out just how many of our successes (and failures) can be attributed to each — and how we can learn to tell the difference ahead of time.

We consider three "crisis shocks" related to key features of the 2007-2008 crisis, for emerging and developed economies: (1) the collapse of global trade, (2) the contraction of credit supply, and (3) selling pressure on firms' equity. Using an international cross-section of firms, we find that returns' sensitivities to these shocks imply large and statistically significant influences on residual equity returns during the crisis period (after controlling for normal risk factors that are associated with expected returns).

This paper provides evidence of the real effects of financial markets. Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect").

This paper compares accounting and finance approaches to equity valuation, with a focus on practical investing. It shows how the two endeavors tie to the same theoretical foundation so they have the potential of being unified. Finance has largely focused on the "denominator" aspect of valuation— the discount rate—under the mantra of "asset pricing" while accounting has largely focused on the numerator; specifying the expected accounting outcomes to be discounted. The paper shows how both accounting and finance can be unified to resolve both the numerator and denominator issue in valuation.

Sovereign Wealth Funds (SWFs) are state-owned investment funds with combined asset holdings that are fast approaching four trillion dollars. Recently emerging as a major force in global financial markets, SWFs have other distinctive features besides their state-owned status: they are mainly located in developing countries and are intimately tied to energy and commodities exports, and they carry virtually no liabilities and have little redemption risk, which allows them to take a longer-term investment outlook than most other institutional investors.