Mispricing in Financial Turbulence, A study of mispricing in public Nordic real estate companies in the 21st century
Abstract: By using the present value of expected dividends model, reversed engineering and the market capitalizations of 14 public Nordic real estate companies between the years 2000-2009, the study examines the reasonableness of the implied return on equity in steady state. The results show that following the stock crash of 2000 the level of implied return on equity in steady state is below reasonable levels, whereas the period leading up to the financial crisis displays levels above historical precedents. Using reasonable levels of the return on equity in steady state the study provides a fundamental valuation alternative to the market capitalization over the time period. The comparison between the fundamental values and the market capitalization displays great mispricing of the public Nordic real estate companies with value differences culminating at the peak before the financial crisis. The study ends by discussing possible explanations for the variation in the implied return of equity in steady state and questions the notion of efficient markets and investor rationality in turbulent times. As of 2008, the results show a normalizing trend in the implied return on equity in steady state. It cannot be rejected that the normalization trend is a result of increased value relevance of accounting numbers, following the IFRS implementation in 2005.
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