Equity Markets, Valuation, and Analysis

H. KENT BAKER, CFA, CMA, is the University Professor of Finance at the Kogod School of Business at American University. Professor Baker is an award-winning author/editor of 36 books. GREG FILBECK, CFA, FRM, CAIA, CIPM, PRM, is the Samuel P. Black III Professor of Finance and Risk Management at Penn State Behrend, and serves as the director for the Black School of Business. HALIL KIYMAZ, CFA, is the Bank of America Professor of Finance at the Crummer Graduate School of Business at Rollins College.

• Acknowledgments xiiiAbout the Editors xvAbout the Chapter Authors xviiChapter 1 Equity Markets, Valuation, and Analysis: An Overview 1H. Kent Baker, Greg Filbeck and Halil KiymazIntroduction 1About This Book 3Structure of the Book 5Summary and Conclusions 12References 13Part One BackgroundChapter 2 Ownership Structure and Stock Classes 17Christopher J. Barnes, Ehsan Nikbakht and Andrew C. SpielerIntroduction 17Single-Class Common Equity 18Dual-Class Common Equity 26Summary and Conclusions 29Discussion Questions 29References 29Chapter 3 Equity Markets and Performance 33Jay T. Brandi and Xudong FuIntroduction 33The Equity Market and the Economy 35Market Indicators 39Good Markets – Liquidity 40Good Markets – Efficiency 41Information Disclosure 43Enforcement 43Monetary Policies 44Investments: Comparative Risk and Return 44Stocks Versus Bonds: The Issuer’s Perspective 47Summary and Conclusions 48Discussion Questions 48References 48Chapter 4 Securities Regulation 51Douglas Cumming and Sofia JohanIntroduction 51Trading Rules and Rules Pertaining to Broker-Dealer Conduct 52Surveillance 58Enforcement 59Impact of Trading Rules and Surveillance on Corporate Outcomes 59Summary and Conclusions 60Discussion Questions 61References 61Chapter 5 Investor Psychology and Equity Market Anomalies 63Hunter M. HolzhauerIntroduction 63Investor Psychology: Bounded Rationality 64Investor Psychology: Prospect Theory 65Equity Market Anomalies: Violations of the EMH 67Summary and Conclusions 73Discussion Questions 74References 74Part Two Valuation and AnalysisChapter 6 Financial Statement Analysis and Forecasting 81Somnath Das and Shailendra PanditIntroduction 81Background 82Technical Analysis–Based Forecasting 83Time Series–Based Forecasting 83Fundamental Analysis–Based Forecasting 85Process of Analyzing Financial Statements 85Evidence on the Usefulness of Financial Statement Analysis 86Security Analysts and Financial Statement Analysis 88Limitations of Using Financial Statement Analysis in Forecasting 90Summary and Conclusion 91Discussion Questions 92References 92Chapter 7 Fundamentals of Equity Valuation 97Emmanuel Boutron, Alain Coën and Didier FolusIntroduction 97What is Equity Valuation? 97Free Cash Flow–Based Valuation 101Dividend-Based Valuation 104Market-Based Valuation: Multiples and Ratios 106Modeling the Required Asset Return 108Option Theory–Based Valuation 110Summary and Conclusions 111Discussion Questions 111References 111Chapter 8 Company Analysis 113David Craig NicholsIntroduction 113Three Steps Linking Business Activities to Equity Prices 113Accounting Analysis 117Fundamental Analysis 119Summary and Conclusions 127Discussion Questions 127References 127Chapter 9 Technical Analysis 131David LundgrenIntroduction 131Background 131Pulling It All Together: Fundamentals, Biases, and Trends 138Summary and Conclusions 145Discussion Questions 146References 146Chapter 10 Discounted Dividend Valuation 149Elif Akben-SelçukIntroduction 149The General Model 149Constant Growth or Gordon Model 150Multistage Models 151Stochastic Models 155Uses of Ddms 158Empirical Tests of the Dividend Discount Model 160Summary and Conclusions 161Discussion Questions 162References 162Chapter 11 Free Cash Flow Valuation 165Tom BarkleyIntroduction 165General Approach to FCF Analysis 166Four Special Cases of FCF Valuation Approaches 170Summary and Conclusions 181Discussion Questions 182References 182Chapter 12 Market-based Valuation 185Sang Hoon LeeIntroduction 185Widely Used Valuation Multiples and Valuation Steps 186Selecting Comparable Firms 190The Efficacy of Different Multiples in Valuation 191Common Factors Determining Different Multiples 195Summary and Conclusions 199Discussion Questions 199References 199Chapter 13 Residual Income Valuation 201Shailendra Pandit and Somnath DasIntroduction 201History and Foundations of Residual Income 201Computing Residual Income 203Equity Valuation Using Residual Income 205Numerical Example 206Applying RI to Equity Valuation 207Evaluation and Critique of Residual Income 208Summary and Conclusions 211Discussion Questions 212References 212Chapter 14 Private Company Valuation 215Onur Bayar and Yini LiuIntroduction 215DCF Valuation Methods for Private Companies 216The Comparable Firms Approach in Private Company Valuation 220The Venture Capital Method for High-Growth Private Companies 224Option Valuation for Private Companies 226Summary and Conclusions 227Discussion Questions 227References 228Part Three Equity Investment Models and StrategiesChapter 15 Equity Investing Strategies 231Nicholas Biasi, Andrew C. Spieler and Raisa VarejaoIntroduction 231Value Investing 232Growth Investing 233Growth at a Reasonable Price 235Income Investing 236Index Investing 236Quantitative Trading 237Technical Analysis 238Options Strategies 239ESG Investing 240Summary and Conclusions 241Discussion Questions 242References 242Chapter 16 Factor Investing 243Aaron FilbeckIntroduction 243History 243Factors of Prominence 246Recent Factor Discoveries 253Portfolio Implementation Considerations 256Summary and Conclusions 259Discussion Questions 260References 260Chapter 17 Smart Beta Strategies versus Alpha Strategies 263Timoathy A. KrauseIntroduction 263What is Smart Beta? 265Empirical Evidence from Factor Investing and Smart Beta Studies 267Recent Empirical Evidence from the U.S. ETF Market 271Summary and Conclusions 274Discussion Questions 274References 274Chapter 18 Activist and Impact Investing 279Michael Sinodinos, Andrew Siwo and Andrew C. SpielerIntroduction 279Methods of Activism 280Institutional Activists 281Individual Activists 283Impact Investing 284Summary and Conclusions 289Discussion Questions 289References 289Chapter 19 Socially Responsible Investing 291Randolph D. NordbyIntroduction 291A Brief History of SRI in the United States 292ESG Growth in Pooled Investment Vehicles 293Responsible Investing Growth by Institutional Investors 294The Performance of Sustainable Investments 294Lack of Guidelines on Voluntary Nonfinancial Disclosure 296ESG Disclosure and Asset Manager Valuation Methodology 296ESG Disclosure Lacks Usefulness 297Methods for Operationalizing ESG Issues 297Fiduciary Duty and ESG Investing 299ESG Integration for Equities 300Considerations for Integrating ESG 300Case Study 301Summary and Conclusions 302Discussion Questions 302References 303Chapter 20 Pooled Investment Vehicles 305Joseph McBride, Michael Pain and Andrew C. SpielerIntroduction 305Open-End Mutual Funds 305Closed-End Funds 309Unit Investment Trusts 311Exchange-Traded Funds 313Summary and Conclusions 316Discussion Questions 317References 317Part Four Special Equity TopicsChapter 21 Investing in Private Equity 321Gaurav Gupta, Tianqi Jiang and Zhao WangIntroduction 321Performance of PE Funds 322Performance Persistence 324Factors Driving PE Performance 325Risk Factors of PE Funds 327Summary and Conclusions 329Discussion Questions 329References 330Chapter 22 Investing in Emerging Markets 333Xiaohua Diao, Shantanu Dutta and Peng Cheng ZhuIntroduction 333Capital Flows to Emerging Markets 334Issues Related to Capital Market Integration 334Institutional Strategies for Better Investment Decisions 336Political Connections, Investment Decisions, and Performance 338Corporate Governance and Performance 340Valuation Practices in Emerging Markets 340Summary and Conclusions 341Discussion Questions 342References 342Chapter 23 Disclosure Regulations in Emerging Economies and Their Impact onEquity Markets 347Xiaohua Diao, Shantanu Dutta and Peng Cheng ZhuIntroduction 347Various Disclosure Regulation Approaches 348Environmental and CSR Disclosure in Emerging Markets 349Insider Trading, Disclosures, and Related Regulation 351Information Disclosure Through Private In-House Meetings 354Summary and Conclusions 356Discussion Questions 357References 357Chapter 24 Equity Crowdfunding Investments 361Dianna PreeceIntroduction 361Types of Crowdfunding 361The Jobs Act of 2012 363Crowdfund Investment Opportunities and Incentives 365Crowdfund Investment Challenges and Disincentives 366Academic Research 369Summary and Conclusions 371Discussion Questions 372References 372Discussion Questions and Answers (Chapters 2–24) 375Index 407