Fundamental Investment Analysis

Firms registered outside the United States and listed on a primary U.S. exchange may provide their U.S. shareholders with financial statements prepared under their domestic (non-U.S.) generally accepted accounting principles (GAAP). The Securities and Exchange Commission requires such firms to reconcile their reported earnings and shareholders' equity to U.S. GAAP as part of a Form 20-F filing. These reconciliations provide a set of precise measures of the differences created by alternative accounting practices.

Price deviations from basic valuation models based on accounting earnings and book value of owners' equity are used to test the intrinsic value explanation of the price-earnings and price-book value anomalies. Relative price deviations from the implied benchmark prices are used to assign years into high and low deviation groups. Traditional zero investment hedge portfolios are formed in each year, and the returns are compared across high and low deviation years.

This paper documents the revaluation practice over a ten-year period from 1981 of a large sample of Australian firms and examines the association between these revaluations and stock market prices and returns. The analysis uses several different approaches in order to obtain a thorough understanding of the reevaluation process in Australia. We include a description of hand-collected data from published financial statements, follow-up interviews with chief financial officers of the sample firms, and association tests between hand-collected accounting data and stock market measures.

This essay reviews the literature on the role of the financial factors in the Depression, and draws some lessons that have more general relevance for the study of the Depression and for macroeconomics. I argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial-real links in the Depression followed a paradigm shift in economics.

This paper assesses policies of mass privatization in Germany, Czechoslovakia, Hungary and Poland. A central concern stemming from the analysis is that, in view of the fiscal crisis facing economies in transition, it is crucial for governments to try to maximize the proceeds from the sale of state assets. Because of the low initial level of private wealth, it is important, in this respect, to let potential buyers borrow from the government or issue claims on future revenues (obtained with the privatized assets) to the government in order to pay for the privatized firms.

Research was conducted to investigate the value implications of the changes in annual earnings. It was assumed that a relationship exists between the persistence of earnings and the changes in stock prices associated with reported earnings innovations. The study yielded three major findings. Results showed that other data contained in annual financial statements can be used to evaluate pricing multipliers. Findings also revealed the variability of the persistence of earnings and the pricing multipliers indicated by financial statements.

This article outlines research developments that reconcile both fundamental analysis and accounting measurement to the modern theory of valuation. Three features of accounting suggest it may play a role. First, it has the nominal attributes of a value measurement system. The financial accounting process is focused on tracking the book value of equity or net worth. The final entry in the periodic accounting cycle is the close to book values.

This article explores the differential measurement problems related to the earnings components by invoking the standard errors-in-variables perspective on estimated coefficients. A more traditional way of looking at accounting recognizes the process as one of measurements. That is, the analysis of transactions leads to line items in the financial statements, which in turn aggregate into the bottom line numbers: earnings and book value. The disclosures of the line items clearly suggest that the accountant is aware of the insufficiency of earnings and book values as determinants of values.

The traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations. This paper demonstrates that when the market is incomplete primary and derivative asset markets, generically, interact: the valuation of derivative and primary securities is a simultaneous pricing problem and primary security prices depend on the contractual characteristics of the derivative assets available.