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.