Advanced Topics in Accounting

Equity Valuation Using Accounting Numbers in the Context of Cyclical and Defensive Industries that are in Economic Growth or Recession

Master's Thesis , 2012 , 89 Pages , Grade: 1

Business economics - Investment and Finance

The empirical research in this thesis aims to better understand two complimentary components. First, whether there is a significant difference in the performance of accounting-based valuation models when examined across different industry types (i.e. cyclical or acyclical) and economic states (i.e. growth or recession). Second, how analysts use accounting-based valuation to justify investment recommendations and whether this changes across the samples aforementioned.

Inhaltsverzeichnis (Table of Contents)

• Introduction
• Literature review
  • Distinction between equity and entity level valuation
  • Multiples based valuation
    • Accuracy of multiples
    • Selecting comparables
    • Choosing multiples
  • Accounting flows based
    • Dividend discount model
    • Free cash flow model
    • Residual income valuation model
      • Derivation
      • Benefits of the model
      • Performance
      • Implementation issues
    • Abnormal earnings growth model
      • Derivation
      • AEGM versus the RIVM
  • Valuation of defensive and cyclical firms
  • Concluding remarks
• Large sample analysis
  • Research question
  • Sample selection
  • Methodology
    • Multiples based valuation
      • Selected value driver
      • Identification of comparable companies
      • Estimation of value
    • Accounting flows based valuation
      • Cost of equity capital
      • Dividend payout rate
      • Forecasted earnings
      • Forecast horizons and continuing value assumption
  • Results and analysis
    • Sample descriptive statistics
    • Valuation errors
      • Descriptive statistics of valuation errors
      • Cross sample comparison of valuation errors
      • Comparison of valuation errors within each sample
    • Interaction between cyclicality and economic state
    • Price explainability
  • Sensitivity tests
    • Multiples based valuation
    • Flow based valuation
      • CAPM assumptions
      • Terminal value
  • Concluding remarks
• Small sample analysis
  • Research question and hypothesis development
    • Target prices (Hypothesis 1)
    • Earnings (Hypothesis 2)
    • Flow models (Hypothesis 3)
    • Investment recommendations (Hypothesis 4)
  • Sample selection
  • Results and analysis
    • Industry characteristics
      • Education services
      • Tobacco manufacturers
      • Food products manufacturing
      • Health services
      • Utilities
      • Housing contractors
      • Primary metal manufacturing
      • Automobile manufacturing
      • Airlines
      • Paper manufacturing
    • Tests of Empirical Hypothesis
      • Target prices versus actual price (Hypothesis 1)
      • Earnings as a value driver (Hypothesis 2)
      • Use of flow based models (Hypothesis 3)
      • Analyst investment ratings (Hypothesis 4)
  • Concluding remarks

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This dissertation examines the performance of accounting-based valuation models in different industry types (cyclical or defensive) and economic states (growth or recession). The research explores how analysts use accounting-based valuation to justify investment recommendations and whether this practice varies across different industry and economic conditions.

• Performance of accounting-based valuation models in cyclical and defensive industries.
• Impact of economic growth and recession on valuation model effectiveness.
• Analyst use of accounting-based valuation for investment recommendations.
• Differences in analyst valuation practices across industry and economic environments.
• Comparison of earnings-based and accounting-flow models in valuation.

Zusammenfassung der Kapitel (Chapter Summaries)

• The introduction provides an overview of the research topic and its significance.
• The literature review examines existing research on equity valuation using accounting numbers, including the distinction between equity and entity level valuation, multiples-based valuation, accounting flows-based valuation, and the valuation of defensive and cyclical firms.
• The large sample analysis investigates the performance of various valuation models in different industry types and economic states using a large dataset. The analysis includes multiple-based valuation and accounting flows-based valuation.
• The small sample analysis explores how analysts use accounting-based valuation to justify investment recommendations in specific industries, examining target prices, earnings, flow models, and investment recommendations.

Schlüsselwörter (Keywords)

The central concepts explored in this dissertation are equity valuation, accounting-based valuation, cyclical and defensive industries, economic growth and recession, analyst investment recommendations, earnings-based models, and accounting-flow models.

• College: Lancaster University
• Course: MSc Finance
• Grade: 1
• Author: Mark Brown (Author)
• Publication Year: 2012
• Pages: 89
• Catalog Number: V214886
• ISBN (eBook): 9783656428602
• ISBN (Book): 9783656439882
• Language: English
• Tags: cyclical, valuation, equity, acyclical, defensive, accounting-based, accounting, growth, recession, economic states, lancaster