FINANCE Corporate financial policy and R and D Management

Earnings Variability

1.VERN: Variability in earnings. This measure is computed as follows:

where Etis the earnings at time t(t= 1,..., 5) and E–is the average earnings

over the past five years. VERN is the coefficient of variation of earnings.

2.VFLO: Variability in cash flows. This measure is computed as the coeffi-
cient of variation of cash flow using data over the past five years—that is, it
is computed in an identical manner to VERN, with cash flow being used in
place of earnings. Cash flow is computed as earnings plus depreciation plus
deferred taxes.

3.EXTE: Extraordinary items in earnings. This is computed as follows:

where EXtis the value of extraordinary items and discontinued operations,
NRItis the value of nonoperating income, and Etis the earnings available
to common before extraordinary items. The descriptor uses data over the
past five years.

4.SPIBS: Standard deviation of analysts’ prediction to price. This is com-
puted as the weighted average of the standard deviation of I/B/E/S analysts’
forecasts of the firm’s earnings per share for the current fiscal year and next
fiscal year divided by the most recent price.

Leverage

1.MLEV: Market leverage. This measure is computed as follows:

where MEtis the market value of common equity, PEtis the book value of
preferred equity, and LDtis the book value of long-term debt. The value

MLEV=

ME ++PE LD

ME

tt t

t

EXTE=

+

=

=

∑

∑

1

1

1

1

T

EX NRI

T

E

tt

t

T

t

t

T

||

VERN=

−

−













=

=

∑

∑

1

1

1

2

1

12

1

T

EE

T

E

t

t

T

t

t

T

()

/

Appendix 8.B 233