| Description |
In this thesis I assess the role of stock market valuation of publicly listed US firms through the financial and economic crisis of 2007-2011. To do so, for each firm in a large sample I apply the Rhodes-Kropf, Robinson, and Viswanathan(2005) approach to decompose the ratio of the market value of the firm to the book value of firm assets into three components: the firm-specific pricing deviation from short-run industry pricing; sector-wide, short-run deviations from firms' long-run pricing; and long-run pricing to book value. I do so for all firms listed in the United States in 12 industries over the period 1977-2013. I find that, through the economic crisis of 2007-2011, variation through time and across industries of firm M/B is unexplained by firm-specific deviations from industry values. In contrast, sector deviations have significant power to explain cross-sectional variation in market-to-book, while long-run deviations have power to explain time-series variation in the ratio of market value to the book value of firm assets. In particular, for the finance industry (banks, insurance companies, and other financial intermediaries) long-run market-to-book value of firms was persistently higher than for other industries through the recent economic crisis. Similarly, sector-wide market-price deviations for the financial sector, while lower than for other industries until 2003 were higher than in other industries for the entire 2003-2013 period, which includes the recent financial crisis. One possibility is that adjustment costs, such as those that would inhibit capital from flowing away from low-valued uses towards high-valued uses, government support, such as the TARP program, or capital market mispricing, were important for financial firms in departures in pricing from historical long-run and industry norms through the great recession. Another possibility is that the capital market mispriced financial firms. In contrast to financial firms, there is very little evidence of a significant role in the financial crisis for stock-market deviations in pricing of real estate firms and the real estate sector. The real estate industry may have contributed through other mechanisms to the financial and economic crisis, but not through pricing in the capital market. |
