Financial Data Analysis (FIN822) TIP If you do not understand something, ask me! Administrative Issues and Course Overview

2 The instructor zMy name is Donglin Li. z zOffice hours: M 15:00-17:00(DTC580), Tu 12:00-14:00, BUS315 zhttp://online.sfsu.edu/~donglin/courses.htmlhttp://online.sfsu.edu/~donglin/courses.html zI will put lecture slides, in-class-work, and project assignments on my web. zResearch interest: xCorporate finance: Agency cost, overinvestment xAccounting: Financial Statement Analysis, Market Anomalies xCredit Risk Analysis

3 My expectation in this course zI want everyone to be able to yunderstand fundamental financial statements ycarry out basic valuation analysis and credit analysis ymaster a set of statistical tools that will help you identify the relation between some accounting variables/ratios and stock returns.

4 This course has not been offered for the past 4 years yPlease do not expect too high from this course.

5 Reference Books: zyou may use any statistics/econometrics textbook that you are familiar with. The textbook should cover regression analysis. zor, z“Introductory Econometrics with Applications” By Ramanathan, 5e, South-Western. z“Analysis of Financial Data”, By Gary Koop, John Wiley

6 Prerequisite zFIN 819 with a grade of B- or better; FIN 825 and 828 recommended.FIN 819FIN zThis course is about numbers, so you should have a good knowledge of financial accounting and statistics.

7 Add, drop and withdrawal policy zThe business school has the policy for add, drop and withdrawal yIn the first four weeks, you have to get enrolled in the class, if you want. yStudents can withdraw at most once.

8 Projects zYou will be given 3 projects. zYou need to have access to a PC.

9 In-Class-Work zThere will be 4 in-class work assignments. zThe schedule of these in-class projects will not be announced in advance, so just come to the lectures.

10 Three quizzes and final exam zThe quizzes are closed-book and closed notes. There are no make-ups. zThe tests are based on material covered in lectures, in-class-work, homework, and projects. z The in-class-work will be relevant for the quizzes; The quizzes will be relevant for the final!

11 Class performance zAny attempt to seek undue favor from the instructor will negatively affect your class performance. zThe instructor cannot assign extra work to any individual to improve her/his grade.

12 Grading zClass performance 5 points zQuiz of lowest score 10 zThe other two quizzes 40 zFinal exam 35 zProjects 30 zTotal 120points

13 Curve grade A range Top 30% B range Top 80% The instructor reserves the right to make minor adjustment if necessary. The cure might be shifted upward if the whole class is doing well on average.

14 Academic integrity zThe instructor has zero tolerance for cheating or looking at each other during the exams. zIn the exams, please sit as far as possible from each other. zIn doing the in-class-work, feel free to discuss with your classmates.

15 Communicate with the instructor zTeaching Style: Lectures, problem solving and computer projects. Please pay attention to what is covered in class. zI appreciate any constructive suggestions (in person or through ) that would improve the course.

16 Course organization zThis course is broken-down into two parts: z 1: Techniques. z 2: Applications of these techniques on data analysis (often analyzing a lot of firm’s financials at the same time.)

17 You also need to understand financial statements well zFinancial analysts use financial statements to rate and value companies. zExternal investors read financial statements to select stocks and decide when to buy or sell. zBankers use them in deciding whether to extend loans and determine loan terms.

18 Financial statements may be cooked; we will introduce some models that unravel earnings management. zEarnings manipulation Earnings management Real earnings management No earnings management GAAP

19 Equity Valuation Analysis zDiscounted cashflow models zResidual income model

20 Credit Analysis zZ-scores zZ=1.2 Net Working Capital/Total assets+1.4 Retained Earnings/Total assets+3.3 EBIT/Total assets +0.6 Market Value of Equity/Book Value of Liability+1.0 Sales/Total assets zCredit rating methods by S&P and Moody’s zLogit/Probit models zMy own model

21 Why is Data Analysis useful? zBecause you do not believe in semi-strong form of market efficiency. zBecause you can identify variables/ratios that might be relied upon to predict future stock returns. zEarn huge bucks! (in theory) zAnother eye-catching item on your resume.

22 In Data Analysis, zWe will focus on regression techniques. zExample, is there a significant relation between firm investment and future stock returns? zWe will discuss several market anomalies.

23 One-year-ahead hedge returns based on capital investment levels. ©Donglin Li 2004 z Go long the lowest investment stocks. z Go short the highest investment stocks. z 12 month size adjusted buy and hold hedge returns after May each year. z Positive in 36 out of 39 years, average 12.6% z Pattern is consistent with market mispricing and inconsistent with semi- strong efficiency.

24 Congratulations on enrolling this exciting (and challenging) course!