 Title : Discussion of The Book-to-Price Effect in Stock Returns: Accounting for Leverage  Topic : Securities Valuation  Theory used by the article / research : › Dichev 1998, Campbell, Hilscher, and Szilagyi 2006, Demers and Joos 2006, Robust across numerous specifications and controls for known risk factors, and is consistent with the inverse relation found between future returns and boarder measure of financial distress and bankruptcy risk in different contexts. › Fama and French 1992, 1998, hypothesize that the book-to-market ratio proxies for financial distress risk, and hence, should display a positive relation with expected and realized returns.

 Hypothesis of research : Financial leverage has a negative relation with future returns after controlling for the firm’s asset risk.  Variable use in research : › Unlevered pricing multiple › Financial leverage Method of analysis: › The use of book values to measure economic leverage First, long term debt values on the balance sheet are assumed to approximate market values. Second, leverage must be present on the balance sheet to be included in the analysis. › The classification of an operating versus financial liability Classify traditional working capital liabilities as operating liabilities and long term debt as a financial liability. › Measurement of Asset Risk Examines the leverage-returns relation after controlling for the firm’s asset risk.

 Result of analysis / research (conclusion) › The Result: › Conditional on operating risk, returns are decreasing in financial leverage. › The ratio unlevered pricing multiple is positively related to future returns. › The value premium associated with unlevered pricing multiple is increasing in leverage; this pattern is consistent with the evidence in Griffin and Lemmon that the book-to-market effect is increasing in the probability of bankruptcy. › The magnitude of the authors’ leverage-return relation is negatively related to future returns is strongest (weakest) among low (high) unlevered pricing multiple deciles, this pattern is also consistent with the evidence found in griffin and Lemmon.

 Conclusion › A theoretical decomposition of the book-to- maket ratio and uses this framework to document a robust negative relation between future returns and leverage after holding the net operating asset dimension of the firm’s pricing multiple constant. › The failure to explore potential reasons for the negative relation is, ultimately, the greatest weakness of the paper, and will likely serve as the impetus for future research projects. › Documented results are consistent with a set of recent papers that document cross-sectional variation in the predictive ability of financial distress, leverage, and the book-to-market ratios.

 The reason : To know the valuation process in this case is stock valuation process and kind of factors that include in valuation process  Title: Stock Valuation Process – The Practitioners’ View  Topic: Securities Valuation

 Theory used by the article / research: › Wells Fargo and BARRA model have the form of APT (Arbitrage Pricing Theory) identify the major determinant of common stock prices and the weight the market place on these determinants. › Gruber and Elton 1995 assume that the market price will converge to the theoretical prices before the theoretical price itself change. Hypothesis of research: Examines the four aspects of valuation process-factors / variables considered while doing valuation, sources of information, forecasting techniques used and valuation methodology, based on pilot survey of 80 variables.

 Variable use in research:  Dependents variables › Risk factors › Liquidity factors › Financial factors › Technical factors › Economic factors › Industry specific factors › Company / specific factors › Others Independents Variables › Data source for company variables › For industry variables › For economic variables

 Method of analysis: › Pilot Study Interviews with a few FIIs, Financial Ananlysis, Mutual Fund Managers and Leading Brokers. › Two-step cluster analysis First step, determine appropriate number of cluster. Build three-culster solution used to group investors having similar profiles across chosen variables. Second step as initial starting values in an “iterative partitioning analysis” for final solution. › Multiple Regression Carried out with portfolio performance as the dependent variables / factors as independent variables.

 Result of analysis / research (conclusion) :  The Result: › Stock is not considered to be risky if beta of the stock is high and viceversa. › Trading volume receives very high weight in the valuation process. Low trading volume implies poor liquidity and high risk. High trading atocks are positively valued whereas low trading stocks are negatively valued. › The fluctuation in foreign exchange rate dampens the market sentiment but affects the valuation of those stocks with export/import implication and hotel &tourism industry. › The cluster analysis, Active style, cluster score greater than the respective mean score by at least one time standard deviation. They consider and react to the large number financial, economic, industry and firm variables. Passive style, cluster score less than the respective mean score by at least one time standard deviation. do more analysis in respect forecasting and valuation stocks. Balanced style, buying both the passive and active concept and occupying the middle ground. › Based on step-wise regression analysis found that none of the economic, industry and firm variables considered in the study could lead to variation in the portfolio performance.

 Conclusion: › A factor has different impact on the valuation of different stock. › The use of large number of variables in the model does not lead to superior portfolio performance. › Suggest that active style is better than passive style and balanced style may be even better considering the high cost of being active players.