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Valuation effects of dispersion in expectations, changes in regulation and cash holdings
Responsable du projet Michel Dubois
Pascal Dumontier
   
Résumé This project is divided in two parts: a) Analysis the components of information risk/uncertainty in the price formation process; b) Analysis of cash holding by firms and their interactions with the product market, investment and financing policies.
Diether, Malloy and Scherbina (2002) show that the dispersion in annual earnings forecasts has a negative impact on future stock returns. With the same proxy, and restricting their analysis to SP500 stocks, Anderson, Ghysels and Juergens (2005) find similar results concerning dispersion in annual earnings forecasts. However, dispersion in long term growth forecasts is positively related to future stock returns. Given these contradictory results, two types of questions arise. The first questions are methodological: Is DMS study robust to the elimination of stale forecasts? What are the implications in terms of future returns? Do firms sorting based on alternative measures of dispersion earn lower returns? Our second set of questions concerns whether information risk (uncertainty) and, more generally, heterogeneity of beliefs is a priced factor. We address the following questions: Are annual earnings dispersion, long term growth forecasts, and dispersion in recommendations priced in a cross-sectional analysis based on stocks (and not portfolios)? Are other proxies for information uncertainty priced at the stock level?

The literature stress that firms cash policy is mainly driven by the precautionary motive. Accordingly, firms hold cash as a buffer to face business risk and to be able to finance future investment; see Opler, Pinkowitz, Stulz and Williamson (1999) and Almeida, Campello and Weisbach (2004). Almost all the research on cash has been made in a single-firm perspective. We extend the analysis and explore the real effect of the precautionary benefit of cash when a firm interacts strategically with its rivals in the product market.
To do so, we follow two alternative roads. First, we investigate how a firm’s cash position affects its competitive performance and conditions its rivals’ choices. Hence, we ask the following question: if, as suggested by the literature, a firm holds cash to mitigate future business risk and finance growth opportunities, under what conditions cash-rich firms capture market shares from their cash-poor rivals?
Second, we explore whether the amount of cash a firm holds influences its strategic investment choices. Real options models stress that competition may induce firms to invest earlier due to the risk of loosing growth opportunities to rivals. We argue that, while the value of investment option may be affected by the interdependence of opportunities with rivals, it should also depend on the firm ability to finance investment as well as the ability of rivals to appropriate the investment opportunity. Indeed, if a firm anticipates that its rivals cannot invest due to financing restrictions, then the firm should not necessarily speed up investment strategically. Our objective is to analyze the joint effect of financial resources and competition.
   
Mots-clés Dispersion of earnings forecasts, cash holding, Dispersion of earning forecasts, stock returns, conflicts of interest, regulation, dual listings, ADR
   
Type de projet Recherche fondamentale
Domaine de recherche Economie d'entreprise
Source de financement FNS - Encouragement de projets (Div. I-III)
Etat Terminé
Début de projet 1-10-2007
Fin du projet 30-9-2010
Budget alloué 172'057.00
Contact Michel Dubois