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 model-

determined 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, - ii -

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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