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Do high-tech stock prices revert to their 'fundamental' value?

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Author Info

  • Leonardo Becchetti
  • Fabrizio Adriani

Abstract

By assuming that fundamentals matter, this article builds a discounted cash flow (DCF) model (which is assumed to be commonly used by fundamentalists) where the determination of the fundamental is affected by variables proxying for the unobserved firm quality and for the value of its real option for expansion. It finds on a sample of high-tech stocks that the cross-sectional distance from the fundamental is significantly affected by chartists' variables measuring stock momentum. It also tests whether stock returns are significantly affected by lagged deviations from the DCF fundamental value. Finding evidence of both 'reversion to the DCF fundamental' and insider trading (or delays in the adjustment of publicly available information), since negative deviations from the fundamental positively affect future stock returns but are, in the meantime, significantly affected by short-term future changes in fundamentals.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310042000220533
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 7 ()
Pages: 461-476

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Handle: RePEc:taf:apfiec:v:14:y:2004:i:7:p:461-476

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References

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Citations

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Cited by:
  1. Chikashi Tsuji, 2006. "Does EVA beat earnings and cash flow in Japan?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(16), pages 1199-1216.
  2. Leonardo Becchetti & Roberto Rocci & Giovanni Trovato, 2007. "Industry and time specific deviations from fundamental values in a random coefficient model," Annals of Finance, Springer, vol. 3(2), pages 257-276, March.
  3. Fabrizio Mattesini & Leonardo Becchetti, 2009. "The stock market and the Fed," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 99-110.

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