BCD Application of Bakshi Chen Dong Stock Valuation Model

This dissertation consists of three essays that examine stock valuation of company BCD on markets in the U.S., Hong Kong, and Taiwan. The first essay investigates the predictive power of the BCD stock valuation model in the U.S. market. The second essay studies the model's investment performance in Hong Kong and Taiwan. The third essay evaluates the impact of mergers on the model's stock mispricing calculations of bidding and target firms.

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BCD Application of Bakshi Chen Dong Stock Valuation Model

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toddae

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ABSTRACT

This dissertation consists of three essays that examine the BCD stock valuation on the U.S., Hong Kong, and Taiwan markets, and in one specific event, merger. The BCD stock valuation is developed by Bakshi and Chen (1998) and extended by Dong (1998). This stock valuation model offers a closed-form solution for valuing stock price. The first essay investigates the predictive power and the investment performance of the BCD stock valuation model by comparing the five valuation measures, including the BCD model-determined mispricing, book/market, earnings/price, size, and past return momentum in the U.S. market. The results show that the BCD model mispricing is the most significant predictor in forecasting future 1-month, 6-month, and 12-month returns among the valuation measures. The second essay studies the investment performance of the BCD stock valuation model in the Hong Kong and Taiwan markets. The relative predictive power of the future stock returns is examined by four valuation measures, including the BCD modeldetermined mispricing, earnings/price, size, and past return momentum. The results show that the BCD model-determined mispricing is always the most significant predictor in both the Hong Kong and Taiwan markets. The third essay adopts the BCD stock valuation model to evaluate the impact of the mergers on the BCD model-determined mispricing to both bidding and target firms,
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the BCD model-determined mispricing to multiple bidders and single bidders, and the mispricing change to merger activity in three situations: (1) when a merger is successful or unsuccessful, (2) if the firm's attitude toward a merger is friendly or hostile, and (3) whether cash or noncash payment is used. The results reveal that the target firms are undervalued before the announcement date and overvalued when the merger is announced. Also, the bidding firms are overvalued relative to the target firms before the announcement date. Moreover, the returns for the bidding firms in successful mergers are larger when the magnitude of undervaluation is larger. Finally, single bidders have higher mispricing than multiple bidders.

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