French election could help propel reform
16 November 2011 | By Pierre Briançon
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A presidential campaign is a terrible thing to waste. In France, a waste would be especially destructive. Investors are finally worrying about the government’s ability to manage its finances and country’s growth potential – the gap between French and German 10-year bond yields has widened from 80 to 190 basis points since the beginning of October. The concern is justified. In government finances, France is closer to Portugal than to Germany.
Candidates who are desperate for votes are always tempted to unleash rival populist proposals, in effect promises to make the situation worse. A much better approach for President Nicolas Sarkozy and his main opponent, socialist François Hollande, would be to agree on the essentials and argue about the details. Then voters would have a choice that is both clear and realistic.
In the short-term, the common goal is fiscal. Investors will flee if there is any sign of hesitation about the official goal of a budget deficit of no more than 3 percent of GDP in 2013. The incumbent finance minister described that target as “sacrosanct” but Hollande has not yet pledged to do whatever it takes to get there. The Socialist party should acknowledge that taxing the rich will not be enough to regain fiscal credibility.
Of course any fiscal plan should rely on the most credible economic forecast – and to be on the safe side, this means the most pessimistic ones.
The long-term goal is to deal with France’s fast-declining competitiveness, seen in ever widening trade and current accounts deficits. The candidates don’t need to agree on the remedies. But the left must admit that the bloated state machine needs fixing, while the right should acknowledge that pain must be shared equitably.
In the 2008-2009 downturn, France was wise enough to avoid cutting growth-friendly spending such as long term investment programmes. Now bolder and tougher reforms are in order, starting with the liberalisation of services and a determined action on labour costs. A lively and realistic debate on how best to reach the agreed goal would be good for the nation – and the euro.
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Context News
The European Central Bank should be “an important element of the answer” to the euro debt crisis, French finance minister François Baroin said in an interview in Les Echos on Nov. 16.
The yields on 10-yr French government bonds rose as high as to 3.72 percent on Nov. 16, with the spread over German Bunds of same maturity at euro-era highs of 190 basis points.
Showing posts with label Stocks; MScore; Basis Points; Desai. Show all posts
Showing posts with label Stocks; MScore; Basis Points; Desai. Show all posts
Wednesday, November 16, 2011
Thursday, June 23, 2011
The Beneish & Nichols O-Score: Identifying Overvalued Stocks for Short Selling & Loss Avoidance
http://www.stockopedia.co.uk/content/the-beneish-nichols-o-score-identifying-overvalued-stocks-for-short-selling-loss-avoidance-57608/
The Beneish & Nichols O-Score: Identifying Overvalued Stocks for Short Selling & Loss Avoidance
Thursday, Jun 23 2011 by Stockopedia Features
Overview
The O-Score is a a short-selling screen based on identifying firms with a high likelihood of earnings overstatement, as well as unrealistic market expectations, poor current operating cash flow, a history of merger activity, and recent / excessive issuances of stock.
Background
Following on from the review of Beneish’s MScore research, it's worth examining the subsequent work by Beneish & Nichols to develop the O-Score (i.e. Overvaluation Score). This is a screening approach which combines the likelihood of fraud with other characteristics capturing value -destruction in order to identify substantial overvaluation. In particular, the O-Score implements a number of conclusions from Michael Jensen's 2005 paper. This outlined the characteristics of overvalued firms with poor managers as including i) weak fundamental performance, ii) a history of acquisitions (particularly where these have been paid for with stock and involve public targets), iii) excessive investment and equity issuance and iv) unrealistic market expectations.
Why is It Interesting?
As the authors themselves note:
“Our results should be of interest to investors who want to avoid large wealth losses, directors who want to identify unrealistic market expectations, and auditors and regulators who want to identify firms with a high risk of accounting impropriety”.
Indeed! such a screen could potentially be used to identify short candidates for those brave (and liquid) enough to consider short-selling, or - more prudently - as a loss-avoidance screen to avoid overvalued companies.
Calculation of the O-Score
The O-Score ranges from zero to five. Firms receive one point if any of the following is true:
A high likelihood of earnings mis-statement, specifically, they have an M-Score in the top 20%.
Low operating cash flow to total assets (they fall in the bottom 20% in terms of cash flow-to-total assets) following research Desai, Rajgopal, and Venkachatalam (2004) that firms with low CFO/P subsequently earn lower returns.
High sales growth (they fall in the top 20% in terms of sales growth) following research which suggest that Wall Street is invariably surprised by high sales growth firms that fail to sustain this performance.
It has engaged in a merger or acquisition in the last five years. This is consistent with prior research that has shown that many mergers destroy shareholder wealth.
Unusual amounts of recent equity issuance, i.e. it has issued equity in excess of the industry median in the last two years. This is based on research that argues that managers prefer to issue (not to issue) shares if they perceive that their stock is overvalued (undervalued).
Does the O-Score work?
As the result below show, the O-Score model predicts year-ahead abnormal stock price declines of over 25%.
The findings are apparently stable by year and for different levels of market capitalisation.
Firms with O-Scores equal to five were also shown to be nearly five times as likely to restate the current period’s earnings at some future date.
Watch Out For
The study excluded financial services firms, firms with less than $100,000 in sales or in total assets, firms with market capitalization of less than $50 million and firms without sufficient data to compute the probability of manipulation.
The Source:
You can read the paper "Identifying Overvalued Equity" by Beneish & Nichols here.
Other Sources:
Empirical Finance on the Ultimate Short Book
Old School Value: Short-selling Thread
James Montier - Joining the Dark Side: Pirates, Spies and Short-sellers
The Beneish & Nichols O-Score: Identifying Overvalued Stocks for Short Selling & Loss Avoidance
Thursday, Jun 23 2011 by Stockopedia Features
Overview
The O-Score is a a short-selling screen based on identifying firms with a high likelihood of earnings overstatement, as well as unrealistic market expectations, poor current operating cash flow, a history of merger activity, and recent / excessive issuances of stock.
Background
Following on from the review of Beneish’s MScore research, it's worth examining the subsequent work by Beneish & Nichols to develop the O-Score (i.e. Overvaluation Score). This is a screening approach which combines the likelihood of fraud with other characteristics capturing value -destruction in order to identify substantial overvaluation. In particular, the O-Score implements a number of conclusions from Michael Jensen's 2005 paper. This outlined the characteristics of overvalued firms with poor managers as including i) weak fundamental performance, ii) a history of acquisitions (particularly where these have been paid for with stock and involve public targets), iii) excessive investment and equity issuance and iv) unrealistic market expectations.
Why is It Interesting?
As the authors themselves note:
“Our results should be of interest to investors who want to avoid large wealth losses, directors who want to identify unrealistic market expectations, and auditors and regulators who want to identify firms with a high risk of accounting impropriety”.
Indeed! such a screen could potentially be used to identify short candidates for those brave (and liquid) enough to consider short-selling, or - more prudently - as a loss-avoidance screen to avoid overvalued companies.
Calculation of the O-Score
The O-Score ranges from zero to five. Firms receive one point if any of the following is true:
A high likelihood of earnings mis-statement, specifically, they have an M-Score in the top 20%.
Low operating cash flow to total assets (they fall in the bottom 20% in terms of cash flow-to-total assets) following research Desai, Rajgopal, and Venkachatalam (2004) that firms with low CFO/P subsequently earn lower returns.
High sales growth (they fall in the top 20% in terms of sales growth) following research which suggest that Wall Street is invariably surprised by high sales growth firms that fail to sustain this performance.
It has engaged in a merger or acquisition in the last five years. This is consistent with prior research that has shown that many mergers destroy shareholder wealth.
Unusual amounts of recent equity issuance, i.e. it has issued equity in excess of the industry median in the last two years. This is based on research that argues that managers prefer to issue (not to issue) shares if they perceive that their stock is overvalued (undervalued).
Does the O-Score work?
As the result below show, the O-Score model predicts year-ahead abnormal stock price declines of over 25%.
The findings are apparently stable by year and for different levels of market capitalisation.
Firms with O-Scores equal to five were also shown to be nearly five times as likely to restate the current period’s earnings at some future date.
Watch Out For
The study excluded financial services firms, firms with less than $100,000 in sales or in total assets, firms with market capitalization of less than $50 million and firms without sufficient data to compute the probability of manipulation.
The Source:
You can read the paper "Identifying Overvalued Equity" by Beneish & Nichols here.
Other Sources:
Empirical Finance on the Ultimate Short Book
Old School Value: Short-selling Thread
James Montier - Joining the Dark Side: Pirates, Spies and Short-sellers
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