Financial Management Association Roundtable on Stock Market Pricing and Value-Based Management

6 Pages Posted: 24 Jan 2007

See all articles by Tom Copeland

Tom Copeland

CRA International; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Bennett Stewart

EVA Dimensions LLC; Stern Stewart & Co.

Trevor S. Harris

Columbia University - Columbia Business School

Stephen F. O'Byrne

Shareholder Value Advisors, Inc.

Justin Pettit

IHS Markit

David Wessels

University of Pennsylvania - Finance Department; Emory University - Goizueta Business School

Don Chew

Morgan Stanley Investment Management

Abstract

group of academics and practitioners addresses a number of questions about the workings of the stock market and its implications for corporate decision-making. The discussion begins by asking what the market wants from companies: Is it mainly just steady increases in earnings per share, which are then capitalized by the market at the current industry P/E multiple to produce a higher stock price? Or does the market pay attention to the quality, or sustainability, of earnings? And are there more revealing measures of annual corporate performance than GAAP earnings - measures that would provide investors with a better sense of companies' future cash-generating capacity and returns on capital?

The consensus was that although many investors respond uncritically to earnings numbers, the most sophisticated and influential investors consider far more than current earnings when pricing stocks. And although the stock market is far from omniscient, the heightened scrutiny of companies resulting from the growth of hedge funds, private equity, and investor activism of all kinds appears to be making the market more efficient in building information into stock prices.

The second part of the discussion explored the implications of this view of the market pricing process for corporate strategy and the evaluation of major investment opportunities. For example, do acquisitions have to be EPS-accretive to be value-adding, or is there a more reliable means of assessing an investment's value added than pro forma EPS effects? Does the DCF valuation method always offer a better guide to value than the method of comparables used by many Wall Street dealmakers? And under what circumstances are the relatively new real options valuation approaches likely to provide a significant advantage over conventional methods?

The main message offered to corporate practitioners is to avoid letting cosmetic accounting effects get in the way of value-adding investment and operating decisions. As the corporate record on acquisitions makes painfully clear, there is no guarantee that an accretive deal will turn out to be value-increasing (in fact, the odds are that it will not). As for choosing a valuation method, there appears to be a time and place for each of the major methods - comparables, DCF, and real options - and the key to success is understanding which method is best suited to the circumstances.

Suggested Citation

Copeland, Thomas E. and Stewart, Bennett and Harris, Trevor S. and O'Byrne, Stephen F. and Pettit, Justin and Wessels, David and Chew, Donald, Financial Management Association Roundtable on Stock Market Pricing and Value-Based Management. Journal of Applied Corporate Finance, Vol. 18, No. 2, pp. 56-81, Spring 2006. Available at SSRN: https://ssrn.com/abstract=959172

Thomas E. Copeland (Contact Author)

CRA International ( email )

John Hancock Tower
200 Clarendon Street, T-33
Boston, MA 02116-5092
United States
(617) 425-3769 (Phone)
(617) 425-3132 (Fax)

HOME PAGE: http://www.crai.com/bio.asp?profid=29129

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
(617) 253-1752 (Phone)
(617) 258-6855 (Fax)

HOME PAGE: http://web.mit.edu/bin/cgicso?options=general&query=T+Copeland

Bennett Stewart

EVA Dimensions LLC ( email )

15 Watersedge Court
Locust Valley, NY 11560
United States
516-759-3711 (Phone)

HOME PAGE: http://www.evadimensions.com

Stern Stewart & Co. ( email )

New York, NY 10022
United States

Trevor S. Harris

Columbia University - Columbia Business School ( email )

3022 Broadway
608 Uris Hall
New York, NY 10027
United States
212-851-1802 (Phone)
212-316-9219 (Fax)

Stephen F. O'Byrne

Shareholder Value Advisors, Inc. ( email )

1865 Palmer Avenue, Suite 210
Larchmont, NY 10538
United States
914-833-5891 (Phone)
914-833-5892 (Fax)

HOME PAGE: http://www.valueadvisors.com/Contact.htm

Justin Pettit

IHS Markit ( email )

200 Connecticut Avenue
Suite 300
Norwalk, CT 06854
United States

David Wessels

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-573-9313 (Phone)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-9091 (Phone)

HOME PAGE: http://goizueta.emory.edu/faculty/faculty_bios_temp.asp?bio_id=1535

Donald Chew

Morgan Stanley Investment Management ( email )

1585 Broadway
10036
United States

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