Ποία είναι τα 4 κύρια βήματα για financial and business analysis: Managers have better
info on a firm’s strategies relative to the info that outside financial analysts have. Superior
financial analyst attempt to discover inside info from analyzing the financial statements. The
four steps for business analysis help outside analysts to gain valuable insights about the firm’s
current performance and future prospects: Business Strategy Analysis (1. Industry
Analysis=> Rivalty, Threat of new entrance, Threat of substitute products, Bargain
power of buyers/suppliers, 2. Competitive Strategy Analysis:=> Cost Leadership,
Differentiation) is an essential first step because it enables the analysts to frame the
subsequent accounting, financial and prospective analysis better. For example identifying the
key success factors and business risk allows identification of key accounting policies.
Assessment of a firm’s competitive strategy facilitates evaluating whether current profitability is
“sustainable”. Finally business analysis enables the analysts to make sound assumptions in
forecasting a firm future performance. Accounting Analysis: enables the analysts to undo any
accounting distortion by recasting firms accounting numbers. Sound (γερό-βάσιμο) accounting
analysis improves the reliability of conclusions from financial analysis Financial Analysis: its
goal is to use the financial data to evaluate the performance of a firm. The outcome from the
financial analysis is incorporated into prospective analysis, the next step in financial statement
analysis. Its usefulness is the analysis of financial info from the users (investors, bankers,
management, auditors) for investing, credit, and managerial or auditing related decisions.
Financial analysis is designed to reveal the relative strengths and weakness of a company as
compared to other firms in the same industry (comparative analysis) and to show whether the
firm’s position has been improved or deteriorating over time (time series analysis). The
objective of financial ratio analysis is to evaluate the effectiveness of the firm’s policies in I)
managing operations, II) managing investment III) financing strategy, IV) dividend policy.
APPLICATIONS: security analysis, valuation, credit analysis, bond ratings, bankruptcy
prediction, dividend policy, mergers and acquisitions, forecasting etc. Prospective Analysis:
synthesizes the insights from business strategy analysis, accounting and financial analysis in
order to make predictions about firm’s future.
What are the major limitations of Accounting Analysis: Financial reporting is noisy and
biased. Accounting analysis has several limitations: Fin. Statesmen’s are based on accrual
accounting (subjective application of accounting standards), managers can manipulate
earnings, Fin. Reporting considers only quantitative info, etc. Factors Influencing Accounting
Quality: Accounting standards (different methods allows for each accounting standard),
Forecast errors (% bad debt exp, % depreciation), Managers Accounting Choice: Managers
manipulate earnings to maximize bonuses, to meet debt covenants, tax considerations, capital
market considerations, meet competition (avoid segment reporting), stakeholder consideration.
They manipulate the earnings by: Classification of good/bad new (extraordinary if bad,
operating if good), Income smoothing (depress earnings in good year and vise versa), Big bath
behavior (in bad years managements will take extra losses), Accounting changes (depreciation
or amortization of goodwill)=> evaluation of accounting quality: identify key accounting
policies, assess accounting flexibility (LIFO, FIFO), evaluate accounting strategy, evaluate
quality of disclosure, identify potential problems (earnings vs cash flows), restate financial data
(undo accounting distortions).
IBM vs Fujitsu: General Differences: Real differences in performance, more conservative
methods in Japanese accounting, Overpricing of shares in Japan, Differences in accounting
methods/policies, Business strategy. Specific differences: In Japan acctg and financial
reporting is identical thus there are incentives to keep earnings down, Inter-firms stock
holdings are common in Japan Keiretsu (income from the affiliates is recorded using the cost
method (20%), that is only dividend income is recorded (not profit). As a result any appreciation
in the value of the investment is not recognized in earnings=> unrecorded earnings leads to
higher P/E and lower ROE), Differences in depreciation methods (Japan uses accelerated
methods and in US the use SLM so PPE is depreciated quicker in Japan), Goodwill effects it
depends from where amortization is deducted from P+L or statement of Retained Earnings),
Special reserves for bad debts/provisions: in Japan they are deducted from special reserve
account but not the same in US), R+D expenses in Japan are expensed immediately but in US
are capitalized, EPS: conservatism in calculation of EPS in Japan because the dominator
includes fully diluted (warrants and convertibles) but in US is the primary EPS.
Notes: 1. high growth firms usually do not pay dividends; stables firms do 2. in cases where
the dominator involves a balance sheet account, the dominator of the ratio is the average for
the last two years 3. High (low) P/E ratio means that the stock is overpriced (under priced) 4.
ratios can be used in more than one category 5. ratios must be always compared to a) industry
benchmark b) prior year results c) forecasted ratio or organization goals 6. There is no
universal definition of these ratios 7. Firms with high market to book ratio are consider high
growth firms 8. YOU EXPECT THE MARKET VALUE OF THE FIRM TO IMPROVE WHEN
THE ROE IS GREATER TEHN THE COSY OF CAPITAL 9. The expected shareholder return
(rE) can never be lower than the rD. 10. MV/BV = f (E(ROE); GROWTH; RISK)
Ratio Analysis: The objective of ratio analysis is the comparative measurement of financial
data to facilitate wise investment, credit and managerial decisions. The informational needs
and appropriate analytical techniques needed for specific investment and credit decisions are a
function of the decision makers’ time horizon (short Vs long). A pervasive problem when
comparing a firm’s performance over time (trend or time series analysis) or with other firms
(cross sectional or common size analysis) is changes in the firm’s size over time and the
different sizes of firms with which it is compared. One approach to this problem is to use the
common size statements in which the various components of the financial statements are
standardized by expressing them as a percentage of some base (base in the income statement
in sales and base in the balance sheet is the total assets). Ratios can be used to standardize
the financial statements allowing for comparisons over time and cross sectional between firms.
Ratios measure a firm’s crucial relationships by relating inputs (costs) with output (benefits) and
facilitate comparisons of these relationships over time and cross firms.
Προβλήματα Μικρών Επιχειρήσεων: 1. Χρηματοοικονομικές καταστάσεις που φτιάχνονται
χωρίς auditing ή κάποιων λογιστικών αρχών (GAAS, GAAP) ή από άτομα που δεν γνωρίζουν
αρκετά. 2. Οι χρηματοοικονομικές τους καταστάσεις μπορεί να υπάρχουν για πολύ λίγο καιρό
3. Δεν έχουν εύρος πελατείας και μπορεί να εξαρτώνται από μόνο ένα πελάτη 4. Οξύς
ανταγωνισμός 5. Βρίσκονται σε περίοδο επέκτασης και οι χρηματοοικονομικές τους
καταστάσεις δεν είναι καλές 6. αντιμετωπίζουν μεγάλο ρίσκο λόγω της αβεβαιότητας των
επιχειρηματικών τους δραστηριοτήτων 7. οικογενειακού τύπου και μπορεί να παρατηρείται
αναποτελεσματικότητα της διοίκησης γιατί μπορεί να είναι μόνο ένας ο λήπτης των
αποφάσεων.=> Άρα για μικρές επιχειρήσεις πρέπει να βλέπεις πέρα από τις
χρηματοοικονομικές τους καταστάσεις και ratios όπως πελάτες. Διοίκηση, περιβάλλον
προοπτικές. Οι αναλυτές ή οι πιστωτές πρέπει να είναι προσεκτικοί αφού δεν μπορούν να τις
ελέγξουν άνετα.
FORECASTING: Usefulness: Managers need forecasts for planning and to provide
performance targets to determine whether their firm is valued properly, avoid violating debt
covenants, Financial analysts need forecasts to help communicate their view of the firm’s
prospects to investors and to determine the value of the stock, Bankers need forecasts to
assess the like hood of the loan repayment. The relationship of forecasts with the other
business analyses is: business strategy analysis determines which factors in firm business
strategy affects future earnings, sales, stock prices, Accounting analysis determines how do
changes in the organization accounting policies will affect future earnings, stock prices and
Financial analysis determines what type of financial info is useful in predicting earnings, sales,
cash flows etc. Forecast accounting numbers are function of retention (διατήρηση), expansion,
inflation, competition, and business strategy. In general prediction should be as comprehensive
as possible and should consider the Industry Specifics, Quarterly Info and business strategy
changes.
Forecasting Sales: Salest+1= Salest + drift; Forecasting Earnings; EPSt+1=EPSt + drift.
These models are called random walk models and describe the average firm behavior and
are not applicable to firms that erect barriers to competition and protected margins for extended
periods. The art of financial analysis requires knowing not only the normal patterns are but also
how to identify those firms that will not follow the norm. This can only be done if the analyst
performs a business strategy, accounting and financial analysis. Forecasting ROE is based in
the Mean Reverting Process model where the ROE in long rung will tend to reach the average
one. E(ROEt+1) = (1/n) Σ ROEt. (mostly influenced by profit margin that is less stable). ROE
cannot increase in perpetuity. It can increase or be above average for a time because a)
barriers to competition (pioneering advantage) b) artifacts of accounting methods
(manipulation) but it eventually revert to mean because c)the economics of competition and d)
increase of investment base (firms with higher ROE usually expand their investment base
which cause the dominator of ROE to increase, growth in earnings also is diminishing over
time. Foster Model: Q (t) – Q(t-4) = a + b* ( Q(t-1) – Q(t-5) )
Valuation Models: Assets Based, Price Multiples (P/E, MV/BM, P/Sales, P/Cash Flows and
DISCOUNTED CASH FLOWS: Dividend based, Earnings based and based on Free Operating
Cash flows since we cannot determine the Cash Flows (Free Operating Cash Flow = C.F. from
operations – C.F. Investments).
Market Value to Book Value per share: MV(t) / BV(t) = 1 + (ROE – r(e)) / (r(e) – g(AE))
ROE is Return on Equity
r(e) is cost of equity from CAPM of WACC is includes and debt
g is growth in book value
g(AE) is growth in abnormal earnings
Full Valuation Formula: MV(t)/BV(t) = 1 + E(ROE-re)/(1+re) + (E(ROE – RE)*(1+g))/(1+re)2…
ROE – re = Abnormal Returns
MV f(E(ROE);E(earnings);E(DIV)), P(0) = DIV/(r) if no growth or else P(0) = DIV/(r-g)
Security Analysis usefulness: it is the evaluation of a firm and its prospects from the
investor’s perspective. It involves a) establishing the objectives of the investor b) forming
expectations about returns and risks c) investment in securities and d) identification of
mispriced securities.
What is an efficient market: If capital markets are efficient then purchase or sale of any
security at the prevailing market price is never a positive NPV transaction. If markets are
efficient stock prices will rapidly reflect all available info. In the American stock market each
stock is being watched out be almost 1000 analysts so the price of a stock will adjust almost
immediately to any new development. Επίσης αποτελεσματικό χρηματιστήριο είναι εκείνο στο
οποίο κανένα φυσικό ή νομικό πρόσωπο δεν μπορεί να επηρεάσει τις τιμές των μετοχών και
τα έξοδα που καταβάλλονται δεν αποθαρρύνουν τους επενδυτές.
What type of investment analysis is undertaken that helps to make security prices
random=> A. Fundamental Analysis: attempts to evaluate the current market price relative to
projections of firm’s future earnings and cash flow generating potential. Many analysts study
the firm business and try to uncover information about its profitability that will shed new light on
the value of the stock. Competition in the fundamental research will tend to ensure that prices
reflect all relevant info and that price changes are unpredictable. B. Technical Analysis:
attempts to predict stock price movements an the basis of market indicators (prior stock price
movement, volume etc). Competition in the technical research will tend to ensure that current
prices reflect all info in the past sequence of prices and that future prices changes cannot be
predicted from past prices.
EMH: Weak: States that security prices reflect all info contained in the record of past prices. So
info about recent trends in stock prices would be of no use in selecting stocks. Using random
walk model you can prove the weak form of efficiency. Semi-strong: security prices reflect all
publicly available info. So it would be no god to pore over annual reports or other published info
because market prices would have already adjusted to any good or bad new contained in this
reports. More investors can wait that will earn the CAPM returns only unless they have inside
info. If new info come up the stock prices will change only if this info are different from the
expected. Ou and Pennan in 1989 used 60ratios to predict one year earnings and they followed
a Trading strategy by investing in companies that will increase their earnings and going short
otherwise. They succeed 8% abnormal return proving semi strong inefficiency. Same study by
Charitou and Panayiotides in 1998 but except earnings they inbound Cash Flows in their model
for UK companies. Strong: Security prices reflect not all publicly info available but also inside
or private info. So insider will find it impossible to earn abnormal returns. Ivan Boesky admitted
of making 50 million by purchasing the stock of firms he knew were about to merge and he
disapproved strong form of market. In general empirical research supports the Weak and
Semi-strong forms of efficiency but some exceptions call MARKET ANOMALIES violate these
efficiency=> January Effect, Monday Effect, Size Effect, P/E ratio effect (invest in companies
will low P/E, empirical evidence that low P/E produced 36% abnormal return). Evaluate
lessons of market efficiency: Markets have no memory (random walk), Trust market prices (it
is very difficult for portfolio managers to achieve better than average risk adjusted performance
by identifying over-or under priced stocks), Reading the entrails, There are no financial illusions
(stock splits do not affect stock price), the do it your self alternative, seen one stock – seen
them all. Positive Theory: Relates to the incentives that motivate managers in their choice of
alternative financial/accounting methods. If markets are inefficient then trading strategies can
be followed to determine whether different methods can be used to gain excess returns
(Bonuses Plan Hypothesis, Debt Covenants, political Risk).
Λόγοι φουσκώματος τιμών το 1999: 1. Αποβολή εταιρειών από το πάτωμα 2. Καθορισμός
των ορίων στην εκτέλεση των πράξεων, 3. Ανοιγοκλείσιμο του μαγαζιού απροσδόκητα 4.
τεχνητή αύξηση των τιμών λόγω καθυστέρηση παραχώρησης των τίτλων, 5. Λίγες οι
εισαγόμενες οι εταιρείες. Λόγοι που οδήγησαν σε πτώση: 1. Τα αποτελέσματα των
εταιρειών δεν δικαιολογούσαν τις τιμές των μετοχών τους 2. Οι ιδιωτικές τοποθετήσεις και
δημόσιες προσκλήσεις ξεζούμισαν την αγορά – έλλειψη ρευστότητας 3. Κατάργηση δανείων
για επενδύσεις από ΚΤ 4. εμμονή της κυβέρνησης για φορολόγηση των κερδών μέχρι και 40%
5. Εισαγωγή πολλών εταιρειών στο ΧΑΚ 6. Επενδυτικές εταιρείες απορρόφησαν πολλά λεφτά
τα οποία βρίσκονται στις τράπεζες αντί στο ΧΑΚ 7. ελλιπής νομοθεσία 8. διπλός ρόλος
χρηματιστών 8. Παιγνίδια από τους έσωθεν 9. αρνητική ψυχολογία λόγω αρχικής πτώσης,
πολλοί ρευστοποίησαν τα κέρδη τους 10. τράπεζα Κύπρου δεν μπήκε στο ΧΑΚ όπως
αναμενόταν, 11. Κύκλος μετά από την άνοδο ήρθε η πτώση 12. Αμάθεια κύπριων. Τα
χαρακτηριστικά του Κύπριου επενδυτή: 1. Συμπεριφορά της Αγέλής 2. Momentum
investment strategy, πουλάς γιατί πιστεύεις στην πτώση και έτσι βοηθάς την πτώση 3.
Αμάθεια και έλλειψη γνώσεων 4. οι κύπριοι είναι τζογαδόροι και κυνηγούν το εύκολο χρήμα.
Εισηγήσεις για ανάκαμψη του ΧΑΚ: 1. Άρση περιορισμού δανείων, 2. τουλάχιστον 25%
μετοχές στο κοινό (1+2 έχουν γίνει), 3. αγοράζεις βασισμένος στα θεμελιακά στοιχεία όχι
βάσει ψίθυρων 4. νομοθεσία σχετικά με το inside info 5. καλύτερη ενημέρωση στο κοινό 6.
εισαγωγή αμοιβαίων κεφαλαίων 7. καλή διαφοροποίηση χαρτοφυλακίων 8. γρηγορότερη
εισαγωγή στο ΧΑΚ των νέων εταιρειών και κατάργηση της γραφειοκρατίας 9. διαχωρισμός
χρηματιστή από σύμβουλο επενδύσεων 10. Μακροπρόθεσμες διαθέσεις αντί
βραχυπρόθεσμες 11. άνοιγμα marginal accounts στις τράπεζες
Why mergers are important (using severe analysis methods): Security analysts examine if
a proposed acquisition create value for the firm’s shareholder, investment bankers find out how
much should be paid for the target firm and how to identify potential target firms, Acquiring
Management see if the target firm fits their business strategy and how much should they pay,
Target firm finds out what are the benefits of the merger to their shareholders and if the offer is
reasonable and finally Risk Arbitrageurs find out what is the likelihood that a hostile takeover
will succeed. Problems with mergers: 1. Not easy to say for sure what the benefits are, 2.
Complex accounting, tax and legal effects 3. Mergers bring shareholders in conflict with
management 4. Hostile takeover with offensive tactics.
Take over is a general term referring to transfer of control of a firm from one group to other. It
contains 1. ACQUIZITIONS => a) Mergers: the complete absorption of one company by
another, where the acquiring firm retains its identity and the acquired firm ceases to exist as a
separate entity, b) Consolidation: a merger in which an entirely new firm is created and both the
acquired and acquiring firms ceased to exist (PricewaterhouseCoopers), c) Acquisition of the
stock, d) Acquisition of the assets, 2. PROXY CONTEST: an attempt to gain control of a firm by
soliciting a sufficient number of stockholders votes to replace existing management 3. Going
Private: Management Buy Outs where all the publicly owned stock in a firm is replaced with
complete equity ownership by private group. Types: Horizontal: a combination of two firms that
produce the same type of goods like Alpha Credit Bank and Lombard, Vertical: a merger
between a firm and one of its suppliers or customers like IBM and Lotus, Congeneric: A merger
of firms in the same general industry but for which no customer or supplier relationship exists
like Disney and ABC, and Conglomerate: a merger of companies in different industries like
Westhouse Electric and CBS. What are the major motives behind mergers: 1. Economies of
scale 2. Capturing tax benefits 3. providing low cost financing to a financially constrained
target, 4. improving target management, 5. combining complementary resources, 6. increasing
product market rents ( increase profits, raise prices, restrict their outputs). Several Reasons
for merging: 1. Tax considerations 2. Diversification 3. Control 4. Synergies (two companies
create greater value than apart this is cause due to Operating Economies, financial economies,
different management efficiency, increase market power) 5. Purchase of assets at below
replacement cost 6. Breakup value (sometimes one companies assets are more valuable to
other company). Empirical Research have showed that a premium of 40-60% is paid to
target companies shareholders, and the stock price of the acquiring firm stays constant so we
can say that the mergers do not create value for the acquiring company and that target
company shareholders ripped all the created value. Also the post merger cash flows operating
performance is an improvement over that of the pre-merger period and that performance
depends on the industry. Pecking order theory (cash, debt, shares). Investment banker
do: Arranging Mergers, Developing Defensive tactics, establishing a fiar value, Financing of
mergers and Arbitrage operations.
Credit Analysis is the evaluation of a firm from the perspective of a holder or potential holder
of its debt. A key element of credit analysis is the PREDICTION of the likelihood a firm will face
financial distress. Financial Distress is general state of being under financial pressure due to
mismatch of cash inflows and cash outflows, cash shortage brought on by customer payments
defaults and poor cash operations. Stages of Business Failure: 1. Incubation (εκκόλαψη economy recession, industry recession, management problems) 2. severe cash shortage 3.
Management attempts to rescue firm (credit expansion, asset liquidation etc) 4. Rescue
attempts fail 5. Management losses control by receivership 6. reorganization efforts fail 7.
bankruptcy 8. liquidation. Why do organizations fail: External=> 1. Macroeconomic
(recession, high interest rate, decrease in monetary supply) 2. Industry (regulation, social
effects, risky industry) 3. Size & Age & ownership (small Vs large, 80% of companies bankrupt
in first 5 years) Internal => 1. Financial position (Negative trend, profitability, solvency, cash
flows, costs) 2. Quality of management (CEO is also chairman, directors do not participate, no
motivation, growing to fast, weak planning and control, no skills) 3. management fraud and
changes in accounting policies (frequent changes of auditors, management fraud) 4.
Operating/internal
factors
(Marketing,
Production,
Finance,
Personnel)
5.
Contingencies/external factors (competition, environmental factors, loss of market share,
customers etc). Why should we predict bankruptcies: because a lot of people losses from
this like Lenders, investors, Auditors (going concern), Management, Employees, economy,
Social effects. Avoid Financial Distress: Quality of management, Quality of Auditors, Leading
institutions, Capital markets.
Methodologies Used: A. Univariate Analysis (Beaver)=> each ratio is evaluated on how
alone could be used to predict bankruptcy without consideration of the other ratios. Beaver was
the first researcher who used this method. He compared the group means of 30 ratios of
bankrupt and healthy companies for 1 to 5 years. A cutoff score is determined for each ratio
and the predictability of each ratio is measured by applying a cutoff score to holdout sample.
Six categories of ratios were used (cash flow, profitability, solvency, liquidity, turnover/activity).
Best performing ratio is cash flow to liabilities. The results were high prediction rates but with
high TYPE I error. This method is very good starting point to gain an idea as to the usefulness
of each ratio prior to using other method or model. The disadvantage is that it uses one ratio at
a time to predict bankruptcy. B. Discriminant Analysis (Altman): Predictive models are based
on a combination of ratios to forecast bankruptcy. The Multiple Disciminant Analysis (MDA)
assigns Z-score to each firm in the sample, using a linear combination of several independent
variables. The model gives a cut-off point (critical value) where if Z > cutoff point then
HEALTHY or if Z < cutoff point BANKRUPT. Altman used 22 variables but only 5 shown
significant. Data for 1946-1965; 33 healthy and 33 bankrupt firms matched by year, industry
and size. Data used for up to 5 years prior to bankruptcy (assumptions for this that do not hold:
ratios must be multivariate normal and covariance matrices of the two groups must be
equivalent). Z = 1.2*(WC/TA) + 1.4*(Ret.Ear/TA) + 3.3*(EBIT/TA) + 0.6*(MV of equity/BV of
debt) + 1*(Sales/TA). If the Z – score for a firm was below (above) the critical value of 2.675 it
signaled bankruptcy (non bankruptcy). If Z>2.99 then HEALTHY, Z < 1.81 BANKRUPT and
1.81 < Z <2.99 is zone of ignorance. C. Logistic regression: Logit assigns to each firm a
probability of bankruptcy (does not specify a cutoff point like MDA). Based on cumulative
probability value that does not require MDA assumptions. Probability = 1 / (1 + e-z) where
Z=a+b1x1+b2x2+ …..+bnxn. If b1=-5 then if x1 increase then the pr of bankruptcy decrease
because if pr>0,5 then BANKRUPT if pr<0,5 then HEALTHY. 1 if bankrupt 0 if healthy.
Legal limitation on dividends in order to protect creditors and bondholders, normal and extra
dividend, not to lead book equity under value. You must follow a smooth dividend policy
because sharp changes affect negative the stock price. /// Po = DIV/(k-g). If DIV is paid
then the g is get lower. If g is increased then DIV is low but if all other constant the Po will stay
the same. DIV = f(expected future permanent earnings).
Stockholders Preferences between dividends and capital gains: 1. Dividend irrelevance
theory (MM): Dividend policy is irrelevant. The value of the firm is determined by its basic
earning power and its risk class and the firms values depends only from the asset investment
policy rather than than on how earnings are split between dividends and retained earnings. So
announcement about the dividends will have no effect on stock price (holds under No personal
and corporate income taxes, no transaction cost, the capital investment is irrelevant from
dividend policy, symmetric of info about future opportunities=> these assumptions do no hold).
2. Bird in the hand (Dividends are preferred than capital gains): investors’ value a dollar of
expected dividend more highly than a dollar of expected capital gain because the dividend yield
compound DIV/Po is less risky than the g component in the total expected return equation K =
DIV/Po + g. So Po=f(E(DIV)) => E(DIV) = f(permanent and increasing earnings) –
maximum payout to maximize stock price. 3. Tax preference theory =DIV < Capital Gains
(1993): Dividend tax is 40% but capital gain tax is 28%. Further by keeping the stock you defer
your capital gains and also defer the tax payment and we know that a dollar tomorrow is worth
less than a dollar today –Low payout as optimal to maximize stock price. Unfortunately
empirical test of the dividend theories have been inconclusive because firms don’t differ just
with respect to payout. So cannot tell managers whether investors prefer dividends or capital
gains.
What issues affect our view regarding towards the three dividend policies: 1. The
signaling or information content hypothesis. a) larger than normal dividends increase signal that
management believes the future is bright, b) a smaller than expected increase or dividend cut
is a negative signal and c) if dividends increase in normal rates this is a neutral signal. 2.
Clientele Effect: Income stock versus Growth stock, tax bracket investors, age of them 3.
Agency costs: a high dividend payout policy would result in scrutiny from many external
agencies since lower retained earnings would force management to obtain external capital on a
regular basis. How firms actually pay dividends: The optimal dividend payout ratio is a
function of four factors a)investors’ preferences for dividends Vs Capital gains, b)the firm’s
reinvestment opportunities c)the firm’s capital structure d)the availability and cost of external
capital. The last 3 elements are combined in what we call the residual dividend model under
which a firm follows the following 4 steps when deciding its target payout ratio: a)it determines
the optimal capital budget b)it determines the amount of equity needed to finance the capital
budget c)it uses retained earnings to supply this equity to the extend possible d)it pays
dividends only if more earnings are available that are needed to support the optimal capital
budget.
Empirical Evidence: In Japan Dividend payout (DIV/Earnings) is higher because earnings are
much more conservative in JPN. On the other hand Japanese companies have lower Dividend
Yield (DIV/Price) because Japanese market values are greater than US markets. LINTNER
(1956) The association of dividends and earnings dDIV = a +b1E +b2lag(DIV) , Charitou and
Vafeas (1998) The association of dividends and earnings and cash flows dDIV = a +b1E
+b2lag(DIV) + b3Cash Flows H1: Cash flows are positively associated with dividends changes
given earnings – not supported, H2: The association between cash flows and dividends
changes is significantly positive for firms with LOW operating cash flows – supported, H3:
Operating cash flows are a better predictor of dividends changes when firms have MODERATE
growth prospects - Suported , De Angelo, De Angelo and Skinner (1992) Dividend and
losses, Y dummy = a + b1Lossdummy + byE + b3ΔΕ == Ydummy = 1 if dividend increase and
0 otherwise, Lossdummy: 0 if firm belong in the loss sample and 1 otherwise. Results support
that losses and earnings are associated with dividends. Charitou Dividends, losses and cash
flows: Evidence from Japan. Same as above but include in the model b4+Cash Flows + b5
Change in CF. Results support that losses earnings and cash flows are associated with
dividends in Japan.
Stock Splits: Αλλαγή στην ονομαστική αξία των μετοχών, αλλαγή στην λογιστική αξία του
κεφαλαίου, αύξηση στο outstanding ποσό μετοχών. Λόγοι: Διεύρυνση επενδυτών που
επιθυμούν να επενδύσουν στην εταιρία, Επιθυμητό εύρος τιμών, Αύξηση ρευστότητας,
περιορισμένη ευθύνη μετόχου και ανάληψη επενδυτικού κίνδυνου, Ώθηση επανεκτίμησης
αξίας μετοχής. Εταιρίες που έχουν προβεί σε stock split είναι αυτές που έχουν ξανακάνει
stock split, έχουν αυξημένα κέρδη και ευκαιρίες ανάπτυξης και η τιμή τους βρίσκεται σε
παρόμοια επίπεδα με παλαιότερα stock spits. Ψηλά κέρδη μπορούν να πραγματοποιηθούν
3-4 βδομάδες πριν την υποδιαίρεση, η μετοχή προσφέρει απόδοση 6 μήνες προηγουμένως
λόγω του slit, η μεγαλύτερη αύξηση σημειώνεται 4-5 μέρες μετά την ανακοίνωση, μείωση της
τιμής λόγω ρευστοποιήσεων την ημέρα της επαναδιαπραγμάτευσης και τα κέρδη είναι
βραχυχρόνια.
How to design a bankruptcy study: 1. Find all Greek firms that filed for bankruptcy during a
certain period of time (at least 20 companies over the most recent period, 1990). Get financial
info (identify most important ratios from prior literature such as cash flow, profitability, liquidity,
solvency) for at least 3-year period prior to bankruptcy. Would be nice to get data for 7 years in
order to test the probability of bankruptcy for at least 5 year prior. Event year is the year of
bankruptcy (year 0). Need also industrial sector of each firm. 2. Match each bankrupt firm with
a Greek healthy firm using the following criteria; industry and Size. It is preferred that the
sample of bankrupt and healthy firms is equal. 3. Define depended variable (Y), 1 if a firm is
bankrupt and 0 if it is healthy. Independed variable (any meaningful ratio from prior literature or
use theoretical Black Scholes model) 4. Spit your sample into 2 groups. Then training sample
(2/3) using the earliest years and a forecasting (training) sample (about 1/3) using the latest
years. 5. use a statistical package SPSS or SAS and a statistical technique (logistic regressing,
NN) to run data from your training sample to get model coefficients. 6. the coefficient deriverd
from your trading model should be applied to your testing, forecasting data. Find probability of
bankruptcy (Pr) 7. If Pr>0,5 then the firm has a greater chance to fail (since why was defined 1
= bankrupt and 0 healthy). If Pr<0,5 then the firm has a greater chance to survive. If Pr>0,5 and
firm in your testing sample is defined as bankrupt the prediction is correct. If Pr<0,5 and firm in
your testing sample is defined as healthy the prediction is correct. If Pr<0,5 and firm is bankrupt
the ERROR TYPE I and ERROR TYPE II otherwise.