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Observed And "Fundamental" Price Earnings. Is There A Dragging Anchor For High-Tech Stocks?

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Author Info
Michele Bagella
Leonardo Becchetti
Fabrizio Adriani

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Abstract

By assuming that a large share of investors follows a fundamental approach to stock picking we build a discounted cash flow (DCF) model (which we assume to be commonly used by fundamentalists) and test on a sample of high-tech stocks whether the strong and the weak version of the model are supported by data. Empirical results show that, even though our "fundamental" price earnings explain a significant share of cross sectional variation of the observed price earnings, the strong version of the discounted cash flow model is rejected for the relevance of additional variables. These are the dividend payout, the number of recommending brokers, the sales to earnings ratio, the institutionals' share and a proxy of firm risk. We argue that all these variables are either signals of firm actual and future capacity of being profitable in a framework of imperfect information and/or proxies for the value of the real option of expansion which represents an important part of value for high-tech stocks. Empirical results of the paper therefore outline a new benchmark for testing market anomalies in which simple rules for building portfolios of value and glamour stocks (size, P/E, book to market), may be replaced by more sophisticated rules based on indicators of the deviation between fundamental and observed firm DCF (plus real option) values

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Paper provided by Tor Vergata University, CEIS in its series Departmental Working Papers with number 138.

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Date of creation: Feb 2001
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Handle: RePEc:rtv:ceiswp:138

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Leonardo Becchetti & Roberto Rocci & Giovanni Trovato, 2004. "Industry and Time Specific Deviations from Fundamental Values in a Random Coefficient Model," CEIS Research Paper 52, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
  2. Leonardo Becchetti & Michele Bagella & Fabrizio Adriani, 2003. "Observed and 'Fundamental' Price Earning Ratios: A Comparative Analysis of High-tech Stock Evaluation in the US and in Europe," CEIS Research Paper 34, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
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