Peer Pressure

1. Introduction
§ Stock Valuation and portfolio construction → two core activities → active equity investment managers
§ Portfolio construction → studied from the point of view of:
i. efficient diversification of risk
ii. individual stock of return
iii. return standard deviations and return correlations
§ Portfolio construction → rank on Market Cap → as value, blended, or growth
§ Investment strategies → value stocks as opposed to Growth stocks
§ Academics used portfolio constructions concerns the universe of stocks considered
§ Testing for the effectiveness of contrarians portfolio strategies:
i. Academics sort over universe of all listed stocks → defined by market capitalization
ii. Practitioners generally focused on narrow group of firms drawn from the same industry
§ One level → test → peer group perspective actually improves upon assessments of relative values
i. Examine the usefulness of → book-to-market, cash flow-to-market, earnings-to-market ratios → explaining the cross-section of observed individual stock values
ii. Estimate how quickly individual firm value ratios correct themselves back toward the peer group median
iii. specifically highlight industry effects on portfolio design and returns to contrarians strategies

2. Literature Review
§ Lie & Lie
i. Apply the multiples-based firm valuation model in a peer group setting → determined by SIC groupings
ii. Examine the explanatory power of both assets-based multiples → in company valuations → enterprise value and equity value
§ Dremen and Lufkin
i. Analyze returns to contrarian strategies → using relative-value rankings and compare them to returns from corresponding rankings

3. Data and Peer Group Construction
§ Kim and Ritter → bankers use valuation via median peer group characteristic multiples → prospective IPO
§ Typical investment banker’s peer group definitions → useful multiple-based valuation analysis
§ Median multiple level → differ significantly across industry peer groups at any given time

4. Using Characteristic Multiples to Value Stocks
§ Lie and Lie (2002) → presuming → forming industry peer groups improves valuation precision
§ Industry-based median ration approach → significantly reduces stock pricing error ↔ aggregated single median ratio approach
§ Current median multiple for industry peer group → used as a forecast of the fair multiple → soon-to-be-listed firms
§ Relative stock valuations within a peer group appear sticky at the one-year horizon
i. Currently observed differences in individual firm book-to-market ratios appear → to reflect firm-specific factors → that tend to persist

5. Ranking Produce Excess Returns in Hedge Portfolios
§ Generic contrarians strategies → constructed based on relative value ranking across the full universe of firms
§ Create a second net return series → Rich stock return minus Cheap stock return
§ Net return series → return on quasi-arbitrage strategy → purchases the portfolio of the cheapest stocks & sell the richest stocks
§ Average return on the industry-neutral version → could be higher / lower → depend on:
i. valuation ratio used
ii. The particular forward period considered
§ Identification appropriate peer group → crucial first step in the company valuation process

6. Result from Deciles Portfolios
§ Our two key equal-weighted portfolios → created by drawing:
i. The cheapest stocks in each industry
ii. The richest stocks in each industry
§ This hedge portfolio has no net exposure to industry effects
§ Average net of return → between these richest and the cheapest portfolio equals zero

7. Conclusion
§ Peer pressure is a term describing the pressure exerted by a peer group in encouraging a person to change their attitude, behavior and/or morals, to conform to
§ Two types of peer pressure:
i. Positive peer pressure → tries to help a company change
ii. Negative peer pressure → tries change a company
§ Contrarian Strategy → approach based on the idea that the market will eventually rediscover out-of-favor stocks and bring the high-flyers back down
§ It looks for medium to large cap stocks with low price / earnings ratios and a potentially strong financial condition

It’s Time to Take a Closer Look at Dividends

Abstract
§ Yields from dividend-paying stocks → very attractive in today's market environment
§ The highest dividend yields tend to come from companies in the utilities, telecommunications services and financial sectors.
o Organization → information technology and health care → not to provide significant dividends.
§ Stock valuations elevated around the world
o investors concerned about equity market volatility

Content
§ Many plan members are still skittish about investing in equities
o Result → holding disproportionate amounts of fixed income
o Dividend-paying stocks → encourage investors to participate in equity market → acquire sufficient growth
§ Successful long-term investors → see a company's ability to distribute dividends consistently → indicator that the business is well run
o Others → dividend-paying stocks → outperform other equities when markets are flat or sinking
o Dividend income → the biggest driver of equity market returns
§ TSX index → grown by a factor of 11 over the past five decades
o TSX Total Return Index → adds by a factor of more than 50 over the same time period
o strong performance has tended to come with lower volatility in recent periods

Attractive Outlooks
§ Yields from dividend-paying stocks → very attractive → today's market environment
o outlook for dividend-paying stocks appears positive
o With:
i. corporate earnings momentum losing steam
ii. stock valuations elevated around the world
iii. investors concerned about equity market volatility
more investors will turn to the reliable returns of dividends

Will You Adopt Quality Financial Reporting?

1. Preface
§ Company is presently “playing around with the scorecard”
i. Embracing the Quality Financial Reporting (QFR)
ii. Start representing as much useful public information as possible
§ Those ways → promises low capital cost → higher security prices → because its more than likely that the capital markets respond to inadequate reporting by bidding stock prices down

2. The traditional reporting model
§ Traditional reporting strategies → Capital markets depend totally on managers to provide public information for their use
§ No standardize Generally Accepted Accounting Principles (GAAP) → compromised
§ Report → too long → managers resisted to initiate new requirements
§ Political pressure → severely compromised standards
§ TQM → The goal is to build good customer relationship and keep working as good as possible
§ Adopt QFR → Build better relationship with capital markets by providing the best financial statement

3. Solving the problem
§ Capital markets have needs and desires for financial information that are not addressed by traditional public reports
§ Balance sheet → perceived as irrelevant
§ Footnotes seem to frustrate analysts the most → capital markets cannot understand them → they do not contain adequate information
§ Three negative outcomes of complying with GAAP:
i. Lack of useful information in financial statements → cause market to pursue other investment opportunities → securities’ lower prices and higher capital cost
ii. Markets decide that the company’s investment potential is great → people may invest after:
1. Taking into consideration the resulting high degree of uncertainty
2. Insisting on higher expected rate of return
→ doesn’t advance the stockholders’ interests
iii. Sophisticated investors and credits will turn elsewhere → market want to discover information that no one else know
§ Managers provide additional public information:
i. Less uncertainty would exist
ii. The analyst’ extra effort and the redundant cost of finding that information would be avoided
iii. Information would be more reliable
§ Uncertainty means more risk to investors → demand higher return

4. Quality financial reporting-A superior strategy
Adopting QFR has positive effects for essentially everyone
§ Managers
i. Having access to cheaper capital
ii. Earn more income and enjoy payoffs from appreciated stock options and other incentives
§ Stockholders
i. Greater demand for their shares
ii. A rate of return that’s appropriate for their real risk
§ Investors and creditors
i. They can evaluate investment opportunities with more emphasis on their financial merits
ii. Less concern for risk created by incomplete information
§ The economy operates more productively
i. The capital markets can establish security prices more efficiently
Two groups will lose when QFR is practiced:
§ People who has somehow fooled the market
§ People who successfully cheat the markets with illegal insider information

5. The high road
Get started with QFL
§ Doing what FASB recommended instead doing what it has permitted
i. Managers usually do not use preferred method → they think that footnote will not improve their securities’ prices
ii. QFR suggest → Markets usually penalized stockholders with lower security prices even management reports larger earnings on the income statement
§ Engage tough auditors and do what they say instead of picking cheap and easy auditors who do what managers say
§ Branch out into new areas based on your own market research and common sense as to what helps statement readers make better decisions

6. Objection and Are you ready?
§ QFR → higher preparation costs created by additional reporting and auditing efforts
§ Respond:
i. The cost of them is still less than the benefit to financial statement users of:
o Minimizing the cost of providing the data by having the firms doing it at once
o Having the firms as the source of information
o Making available an additional source of information that confirms or denies other sources
§ Resisting QFR because of preparation costs seems to be very shortsighted
§ It must flow from the efforts