Fundamental Investment Analysis

Monetary models based on cash-in-advance constraints make strong predictions about the stochastic properties of endogeneous variables such as the velocity of circulation of money, the rate of inflation, and real and nominal interest rates. We develop numerical methods to understand these predictions because the models cannot be characterized analytically. We calibrate some cash-in-advance models using driving processes estimated from U. S. time-series data to generate model predictions that are compared to sample statistics.

In this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings/returns associations. The primary model motivating this research relies on the idea that book value (owners' equity) and market value are both "stock" variables indicating the wealth of the firm's equity holders. The related "flow" variables (after adjusting for dividends) are, respectively, earnings divided by price at the beginning of the return period (A/P-1) and market returns.

This article evaluates the role of rate of return (ROE) in assessing cross-sectional differences in prices and price changes of ROE. Accounting ROE is traditionally regarded as the major summary number in financial statement analysis. Findings of the study indicate that ROE is best interpreted as a profitability measure and not as a risk measure and observed ROE indicates future profitability and thus distinguishes market-to-book ratios. The comparison of earnings to book values in the ROE calculation provides information about how earnings project to future earnings.

This article provides confirmatory evidence of the value-relevance of book values of oil and gas properties. Harris and Ohlson (1987) find that the book values correlate significantly with the inferred market values of oil and gas properties. Reserve recognition accounting requires the simultaneous publication of alternative measures that are often assumed to be more relevant values of the oil and gas properties.

By committing to terminate funding if a firm's performance is poor, investors can mitigate managerial incentive problems. These optimal financial constraints, however, encourage rivals to ensure that a firm's performance is poor; this raises the chance that the financial constraints become binding and induce exit. We analyze the optimal financial contract in light of this predatory threat. The optimal contract balances the benefits of deterring predation by relaxing financial constraints against the cost of exacerbating incentive problems. (JEL 610)

This paper performs a financial statement analysis that combines a large set of financial statement items into one summary measure which indicates the direction of one-year-ahead earnings changes. Positions are taken in stocks on the basis of this measure during the period 1973–1983, which involve canceling long and short positions with zero net investment. The two-year holding-period return to the long and short positions is in the order of 12.5%. After adjustment for "size effects" the return is about 7.0%. These returns cannot be explained by nominated firm risk characteristics.

This paper is motivated by two facts: failure of log-linear empirical exchange rate models of the 1970's and the observed variability of risk premiums in the forward market. Rational maximizing models predict that changes in conditional variances of monetary policies, government spendings, and income growths affect risk premiums and induce conditional volatility of exchange rates.

In this article we construct a model in which a consumer's utility depends on the consumption history. We describe a general equilibrium framework similar to Cox, Ingersoll, and Ross (1985a). A simple example is then solved in closed form in this general equilibrium setting to rationalize the observed stickiness of the consumption series relative to the fluctuations in stock market wealth. The sample paths of consumption generated from this model imply lower variability in consumption growth rates compared to those generated by models with separable utility functions.

In this paper we show that information in prices that leads (future) earnings is contained in financial statements. While accrual accounting rules produce an earnings number which reflects the information in stock prices with a lag, they also produce a large array of additional numbers presented in the income statement, balance sheet, and statement of changes in financial position. We demonstrate that certain of these numbers can be summarized into one measure that predicts future earnings.