The Relation between Market Prices and Fundamental Value Surrounding a Corporate Restructuring
33 Pages Posted: 7 Nov 1997
Date Written: September 1997
Abstract
This study examines the correlation between market prices and an accounting-based fundamental value following a corporate restructuring. Although restructuring charges are included in income from operations, earnings before ?non-recurring? costs are prominently discussed by management and the popular press. This has prompted concern that these operating costs are not fully impounded by the market. We use the Feltham and Ohlson residual income model to estimate the value implications of a restructuring. This approach is ideally suited to the restructuring event which sacrifices current book value to enhance future earnings. We find that observed price changes are highly correlated with the changes in firm value implied by the accounting-based model. However, we also find an unanticipated negative relation between the change in value and future returns. This anomalous result can be explained by a negative correlation in the value estimates, consistent with initial overoptimism in the analyst forecast data.
JEL Classification: G12, M41, G14
Suggested Citation: Suggested Citation