H. Kent Baker - Equity Markets, Valuation, and Analysis

1 Cover

2 Acknowledgments Acknowledgments A good editor is someone who cares a little less about the author's needs than the reader's . Dene October Bringing this book from the idea stage to publication was a team effort. We greatly appreciate the roles played by all participants – some more direct than others. We thank our chapter authors for sharing their knowledge. They painstakingly wrote and then revised each chapter multiple times without complaint. We edited your words but not your message. Without your dedication, this book would not exist. We also thank the highly talented professionals at John Wiley & Sons, especially Bill Falloon (executive editor), Richard Samson (project editor), and Koushika Ramesh (production editor), for their guidance. We also thank everyone at Cape Cod Compositors, Inc. Additionally, we recognize the support provided by the Kogod School of Business at American University, the Behrend College at Penn State Erie, and the Crummer Graduate School of Business at Rollins College. Finally, we express gratitude for our families, who have largely been our silent partners in this process. We dedicate this book to Linda and Rory Baker; Janis, Aaron, Andrea, Kyle, and Grant Filbeck; Nilgün and Tunc Kiymaz.

3 About the Editors

4 About the Chapter Authors

5 CHAPTER 1: Equity Markets, Valuation, and Analysis: An Overview INTRODUCTION ABOUT THIS BOOK STRUCTURE OF THE BOOK SUMMARY AND CONCLUSIONS REFERENCES

6 PART One: Background CHAPTER 2: Ownership Structure and Stock Classes INTRODUCTION SINGLE-CLASS COMMON EQUITY DUAL-CLASS COMMON EQUITY SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 3: Equity Markets and Performance INTRODUCTION THE EQUITY MARKET AND THE ECONOMY MARKET INDICATORS GOOD MARKETS – LIQUIDITY GOOD MARKETS – EFFICIENCY INFORMATION DISCLOSURE ENFORCEMENT MONETARY POLICIES INVESTMENTS: COMPARATIVE RISK AND RETURN STOCKS VERSUS BONDS: THE ISSUER'S PERSPECTIVE SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 4: Securities Regulation INTRODUCTION TRADING RULES AND RULES PERTAINING TO BROKER-DEALER CONDUCT SURVEILLANCE ENFORCEMENT IMPACT OF TRADING RULES AND SURVEILLANCE ON CORPORATE OUTCOMES SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 5: Investor Psychology and Equity Market Anomalies INTRODUCTION INVESTOR PSYCHOLOGY: BOUNDED RATIONALITY INVESTOR PSYCHOLOGY: PROSPECT THEORY EQUITY MARKET ANOMALIES: VIOLATIONS OF THE EMH SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES

7 PART Two: Valuation and Analysis CHAPTER 6: Financial Statement Analysis and Forecasting INTRODUCTION BACKGROUND TECHNICAL ANALYSIS–BASED FORECASTING TIME SERIES–BASED FORECASTING FUNDAMENTAL ANALYSIS–BASED FORECASTING PROCESS OF ANALYZING FINANCIAL STATEMENTS EVIDENCE ON THE USEFULNESS OF FINANCIAL STATEMENT ANALYSIS SECURITY ANALYSTS AND FINANCIAL STATEMENT ANALYSIS LIMITATIONS OF USING FINANCIAL STATEMENT ANALYSIS IN FORECASTING SUMMARY AND CONCLUSION DISCUSSION QUESTIONS REFERENCES CHAPTER 7: Fundamentals of Equity Valuation INTRODUCTION WHAT IS EQUITY VALUATION? FREE CASH FLOW–BASED VALUATION DIVIDEND-BASED VALUATION MARKET-BASED VALUATION: MULTIPLES AND RATIOS MODELING THE REQUIRED ASSET RETURN OPTION THEORY–BASED VALUATION SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 8: Company Analysis INTRODUCTION THREE STEPS LINKING BUSINESS ACTIVITIES TO EQUITY PRICES ACCOUNTING ANALYSIS FUNDAMENTAL ANALYSIS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 9: Technical Analysis INTRODUCTION BACKGROUND PULLING IT ALL TOGETHER: FUNDAMENTALS, BIASES, AND TRENDS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 10: Discounted Dividend Valuation INTRODUCTION THE GENERAL MODEL CONSTANT GROWTH OR GORDON MODEL MULTISTAGE MODELS STOCHASTIC MODELS USES OF DDMS EMPIRICAL TESTS OF THE DIVIDEND DISCOUNT MODEL SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 11: Free Cash Flow Valuation INTRODUCTION GENERAL APPROACH TO FCF ANALYSIS FOUR SPECIAL CASES OF FCF VALUATION APPROACHES SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 12: Market-based Valuation INTRODUCTION WIDELY USED VALUATION MULTIPLES AND VALUATION STEPS SELECTING COMPARABLE FIRMS THE EFFICACY OF DIFFERENT MULTIPLES IN VALUATION COMMON FACTORS DETERMINING DIFFERENT MULTIPLES SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 13: Residual Income Valuation INTRODUCTION HISTORY AND FOUNDATIONS OF RESIDUAL INCOME COMPUTING RESIDUAL INCOME EQUITY VALUATION USING RESIDUAL INCOME NUMERICAL EXAMPLE APPLYING RI TO EQUITY VALUATION EVALUATION AND CRITIQUE OF RESIDUAL INCOME SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 14: Private Company Valuation INTRODUCTION DCF VALUATION METHODS FOR PRIVATE COMPANIES THE COMPARABLE FIRMS APPROACH IN PRIVATE COMPANY VALUATION THE VENTURE CAPITAL METHOD FOR HIGH-GROWTH PRIVATE COMPANIES OPTION VALUATION FOR PRIVATE COMPANIES SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES

8 PART Three: Equity Investment Models and Strategies CHAPTER 15: Equity Investing Strategies INTRODUCTION VALUE INVESTING GROWTH INVESTING GROWTH AT A REASONABLE PRICE INCOME INVESTING INDEX INVESTING QUANTITATIVE TRADING TECHNICAL ANALYSIS OPTIONS STRATEGIES ESG INVESTING SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 16: Factor Investing INTRODUCTION HISTORY FACTORS OF PROMINENCE RECENT FACTOR DISCOVERIES PORTFOLIO IMPLEMENTATION CONSIDERATIONS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 17: Smart Beta Strategies versus Alpha Strategies INTRODUCTION WHAT IS SMART BETA? EMPIRICAL EVIDENCE FROM FACTOR INVESTING AND SMART BETA STUDIES RECENT EMPIRICAL EVIDENCE FROM THE U.S. ETF MARKET SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 18: Activist and Impact Investing INTRODUCTION METHODS OF ACTIVISM INSTITUTIONAL ACTIVISTS INDIVIDUAL ACTIVISTS IMPACT INVESTING SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 19: Socially Responsible Investing INTRODUCTION A BRIEF HISTORY OF SRI IN THE UNITED STATES ESG GROWTH IN POOLED INVESTMENT VEHICLES RESPONSIBLE INVESTING GROWTH BY INSTITUTIONAL INVESTORS THE PERFORMANCE OF SUSTAINABLE INVESTMENTS LACK OF GUIDELINES ON VOLUNTARY NONFINANCIAL DISCLOSURE ESG DISCLOSURE AND ASSET MANAGER VALUATION METHODOLOGY ESG DISCLOSURE LACKS USEFULNESS METHODS FOR OPERATIONALIZING ESG ISSUES FIDUCIARY DUTY AND ESG INVESTING ESG INTEGRATION FOR EQUITIES CONSIDERATIONS FOR INTEGRATING ESG CASE STUDY SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 20: Pooled Investment Vehicles INTRODUCTION OPEN-END MUTUAL FUNDS CLOSED-END FUNDS UNIT INVESTMENT TRUSTS EXCHANGE-TRADED FUNDS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES

9 PART Four: Special Equity Topics CHAPTER 21: Investing in Private Equity INTRODUCTION PERFORMANCE OF PE FUNDS PERFORMANCE PERSISTENCE FACTORS DRIVING PE PERFORMANCE RISK FACTORS OF PE FUNDS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 22: Investing in Emerging Markets INTRODUCTION CAPITAL FLOWS TO EMERGING MARKETS ISSUES RELATED TO CAPITAL MARKET INTEGRATION INSTITUTIONAL STRATEGIES FOR BETTER INVESTMENT DECISIONS POLITICAL CONNECTIONS, INVESTMENT DECISIONS, AND PERFORMANCE CORPORATE GOVERNANCE AND PERFORMANCE VALUATION PRACTICES IN EMERGING MARKETS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 23: Disclosure Regulations in Emerging Economies and Their Impact on Equity Markets INTRODUCTION VARIOUS DISCLOSURE REGULATION APPROACHES ENVIRONMENTAL AND CSR DISCLOSURE IN EMERGING MARKETS INSIDER TRADING, DISCLOSURES, AND RELATED REGULATION INFORMATION DISCLOSURE THROUGH PRIVATE IN-HOUSE MEETINGS SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES CHAPTER 24: Equity Crowdfunding Investments INTRODUCTION TYPES OF CROWDFUNDING THE JOBS ACT OF 2012 CROWDFUND INVESTMENT OPPORTUNITIES AND INCENTIVES CROWDFUND INVESTMENT CHALLENGES AND DISINCENTIVES ACADEMIC RESEARCH SUMMARY AND CONCLUSIONS DISCUSSION QUESTIONS REFERENCES