Rating to economic profit: Valuation properties, implementation issues, and the justification of target prices

Ballas, Apostolos; Chlomou, Grigoria; Demirakos, Efthimios

Abstract

This study offers a comprehensive theoretical and empirical analysis of a fundamentals-based investment criterion (HSBC’s Rating to Economic Profit – REP). By employing a large sample of US-listed firms over a 12-year time-period and conducting univariate, multivariate and portfolio analyses, we provide robust empirical results that support the ability of REP to explain contemporaneous stock market valuations, justify financial analysts’ target prices, and predict one-year ahead stock returns. Through content analysis of selected financial analysts’ equity research reports, we also provide some descriptive evidence of the usefulness of accrual accounting numbers over dividends for valuation purposes. To the best of our knowledge, this is the first academic study that offers a comprehensive analysis of REP as a value-based stock screening method that should be of interest to market-based accounting researchers, valuation educators, and capital market participants.

Citation

Ballas, A., Chlomou, G., & Demirakos, E. (2024). Rating to economic profit: Valuation properties, implementation issues, and the justification of target prices. Investment Analysts Journal, 53(2), 142-166. https://doi.org/10.1080/10293523.2023.2269669

• Journal Article Type: Article
• Acceptance Date: Oct 6, 2023
• Online Publication Date: Nov 26, 2023
• Publication Date: 2024
• Deposit Date: Jan 5, 2024
• Publicly Available Date: Jun 12, 2024
• Journal: Investment Analysts Journal
• Print ISSN: 1029-3523
• Electronic ISSN: 2077-0227
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 53
• Issue: 2
• Pages: 142-166
• DOI: https://doi.org/10.1080/10293523.2023.2269669
• Keywords: rating to economic profit (REP), price-to-book, return on equity, financial analysts, equity valuation, target prices, stock returns
• Public URL: http://researchrepository.napier.ac.uk/Output/3445551