FINANCE Corporate financial policy and R and D Management

model incorporates reported earnings, book value, cash flow, and sales, the
corresponding relative variables, and an equally weighted composite model
of earnings forecasts and their forecast derivative variables. The significance
of the CTEF variable is quite similar to the one-year-ahead EPS breadth.
We estimate a similar monthly model for the January 1990–December
2003 period.

TRt+1= a 0 + a 1 EPt+ a 2 BPt+ a 3 CPt+ a 4 SPt

+ a 5 REPt+ a 6 RBPt+ a 7 RCPt+a 8 RSPt+ a 9 CTEFt+ et (8.11)

where EP = (earnings per share)/(price per share)
= earnings-price ratio
BP = (book value per share)/(price per share)
= book-price ratio
CP = (cash flow per share)/(price per share)
= cash flow-price ratio
SP = (net sales per share)/(price per share)
= sales-price ratio
REP = (current EP ratio)/(average EP ratio over the past
five years)

Further Estimations of a Composite Equity Valuation Model 215

TABLE 8.3 Monthly

Information Coefficients,

1990–2003

Variable IC (t)

EP .047 (41.71)

BP .011 (10.04)

CP .039 (34.52)

SP .009 (7.52)

DY .052 (40.57)

NCAV –.006 (–4.52)

FEP1 .042 (34.60)

FEP2 .030 (24.68)

RV1 .038 (13.16)

RV2 .026 (8.56)

BR1 .043 (25.06)

BR2 .037 (25.06)

CTEF .049 (40.57)