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Séminaires de Gestion Foreign Profitability and Dividend Policy Robert JOLIET FNRS Research Fellow Université de Liège Multinational Firms & Segmental Financial Performance • Typically, the long-term growth rate of a project will be highly correlated with economic growth in the country, specially in the long-run and according to the firm’s business. Percentage profitability and earnings vary from one country to another. A relatively “low” profitability in one country might be acceptable in a different one. International diversification smoothing effect vs. specific regional effect. 2 The Value of Foreign Operations Operations in different countries present the firm with different costs, barriers, political climates and legal restrictions Operating regions/countries usually experience varied rates of profitability, risk and growth. Valuation likely varies depending upon the location of the operations disaggregation needed A geographical breakdown of firms’ operations may provides investors with useful information. Investors may not fully understand the benefits and risks involved in the heterogeneous foreign operations tend to underestimate the persistence of foreign earnings. IS THERE INTERACTION WITH DIVIDEND POLICY ? 3 The Effect of Segmental Profitability on Stock Returns Corporate Profitability is an essential key component in the computation of the cost of equity. Expected Dividend Yield Future Growth Rate for a multinational firm i, operating in n foreign region j 4 The Effect of Segmental Profitability on Stock Returns (2) Assuming a changing profitability associated with forthcoming projects associated with existing projects 5 Dividend Yield & Segmental Profitability Depends on the investment growth opportunities available (investors’ expectations & agency costs problems) Signalling effects 6 Empirical Analysis 388 firms from North America, Europe, and Australasia Study on a 10 year period (1993-2003) Based on incremental regional accounting profitability (ROIC) with respect to the domestic one (levels and changes). Regional and Country-specific analysis Simultaneous and lagged stock returns, following the firm’s fiscal year Dividend-paying stocks vs. Non-dividend-paying stocks Dividend per share adjusted for stock splits Year, industry and firm’s nationality (fixed) effects. 7 A. Dividend-Paying Stocks 8 Empirical Analysis (1) : Dividend-Paying stocks – Simultaneous Stock Returns & Segmental Profitability 9 Empirical Analysis (2) : Dividend-Paying stocks – Lagged Stock Returns & Segmental Profitability 10 Empirical Analysis (3) : Dividend-paying stocks – Lagged Stock Returns & Segmental Profitability Variation, Dividend Yield 11 Empirical Analysis (4) : Dividend-paying stocks – Expected Dividend Yield & Segmental Profitability 12 Empirical Analysis (5) : Dividend-paying stocks – Past Dividend Yield & Segmental Profitability 13 B. Non-Dividend-Paying Stocks 14 Empirical Analysis (6) : Non-Dividend-paying stocks – Simultaneous Stock Returns & Segmental Profitability 15 Empirical Analysis (7) : Non-Dividend-paying stocks – Lagged Stock Returns & Segmental Profitability 16 Concluding Remarks The relation between geographical profitability and common equity valuation depends on investors’ expectations and whether a firm pays dividends. Dividend Policy seems to give a sign to investors about the profitability and the investment opportunities in the different area of operations.The dividend yield tends to be pushed down by operating regions/countries with sustainable growth opportunities. 17 Thank you for your attention 18