Equity pricing in the forest sector: evidence from North ...

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Equity pricing in the forest sector: evidence from North American stock markets

Can. J. For. Res. Downloaded from www.nrcresearchpress.com by Hubei university on 06/05/13 For personal use only.

Kurt Niquidet

Abstract: Financial capital is very mobile and the failure to earn the cost of capital can result in capital flight and a considerably altered forest industry. This article seeks to assess the cost of equity capital for the forest sector from a modern finance perspective and test to what extent it has earned the cost of this capital over the period spanning from December 2003 to December 2008. To do so, using time series and cross-sectional methods, the capital asset pricing model and the Fama–French three-factor model were applied to the weekly returns of 45 publicly traded forest sector securities that are listed on North American stock exchanges. The time series results for both the capital asset pricing and Fama–French three-factor models yielded several negative pricing errors, suggesting ex post that many firms in the sector have failed to earn the cost of equity. Furthermore, cross-sectional results show that riskier firms tended to have lower returns. Such findings are unlikely to hold in the long run and could be one of the primary factors driving significant change in the forest sector in the future. Re´sume´ : Le capital financier est tre`s mobile et l’incapacite´ de recouvrer le couˆt du capital peut engendrer une fuite de capitaux et transformer conside´rablement l’industrie forestie`re. Cet article cherche a` e´valuer, dans une perspective financie`re moderne, le couˆt des capitaux propres pour le secteur forestier et a` tester dans quelle mesure le couˆt de ces capitaux a pu eˆtre recouvre´ au cours de la pe´riode de dećembre 2003 a` dećembre 2008. Pour ce faire, a` l’aide de me´thodes d’analyse des se´ries chronologiques et transversales, le mode`le d’e´valuation des actifs financiers et le mode`le a` trois facteurs de Fama–French ont e´te´ applique´s aux revenus hebdomadaires de 45 titres du secteur forestier inscrits sur les Bourses nordame´ricaines. Les re´sultats des se´ries chronologiques, tant pour le mode`le d’e´valuation des actifs financiers que le mode`le de mode`le a` trois facteurs de Fama–French, ont produit plusieurs erreurs ne´gatives de fixation des prix, indiquant a posteriori que plusieurs socie´te´s du secteur n’ont pas reússi a` recouvrer le couˆt de leurs capitaux propres. En outre, les re´sultats des se´ries transversales montrent que les socie´te´s plus risqueés ont eu tendance a` avoir des rendements plus faibles. De tels re´sultats ont peu de chances de se perpe´tuer et pourraient eˆtre un des principaux facteurs responsables de changements significatifs a` venir dans le secteur forestier. [Traduit par la Re´daction]

Introduction The global forest sector is fiercely competitive. Consequently, firms are under constant pressure to operate in the most efficient manner. In this environment, a critical aspect to maintaining competitiveness is the ability to source capital. In fact, Binkley (1993) argued that growing trees is one of the most capital-intensive endeavours and the processing sector (particularly pulp and paper) is renowned for its large capital requirements (Campbell 2009). Additionally, given the long investment horizons associated with many forestrybased assets, management decisions and resource valuation tend to be very sensitive to capital costs. In general, firms have two sources of capital: debt and equity. Driven largely by a firm’s default risk, the cost of debt for a firm is reflected by market interest rates on recently issued bonds. Pricing equity, on the other hand, is not as straightforward and can be a source of debate. The most notable and widely used equity pricing model is the single-factor capital asset pricing model (CAPM) developed by Sharpe (1964) and Lintner (1965). Indeed, a survey by Graham and Harvey (2001) found that 73.5% of chief finan-

cial officers in the United States used the CAPM to price the cost of equity. In terms of forestry-related assets, several studies have employed the CAPM, particularly for timberland (e.g., Caulfield 1994; Lundgren 2005). Overall, these studies have found that timberland has low systematic risk and provides a high return relative to this risk. However, issues surrounding the measurement of timberland returns have plagued these analyses (Washburn and Binkley 1989). Frequently, stumpage or log prices are used as a proxy for return. As noted by Sun and Zhang (2001), this is not appropriate, as this is just one source of timberland returns. Furthermore, stumpage or log prices are often reported as period averages and their use in the CAPM tends to bias model parameters (Washburn and Binkley 1990). In an attempt to overcome these pitfalls, more recent studies have used returns from a timberland index created by the National Council of Real Estate Investment Fiduciaries. However, this timberland index is also not without problems, suffering primarily from the fact that returns are based heavily on appraisals rather than actual market transactions (Lutz 2008).

Received 3 July 2009. Accepted 23 February 2010. Published on the NRC Research Press Web site at cjfr.nrc.ca on 28 April 2010. K. Niquidet. Pacific Forestry Centre, Canadian Forest Service, 506 West Burnside Road, Victoria, BC V8Z 1M5, Canada (e-mail: [email protected]). Can. J. For. Res. 40: 943–952 (2010)

doi:10.1139/X10-048

Published by NRC Research Press

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Can. J. For. Res. Vol. 40, 2010


Table 1. Description of firms included in the asset pricing models. Company AbitibiBowater Ainsworth Amcor Aracruz Buckeye Technologies Canfor Caraustar Industries

Exchange NYSE TSE OTC NYSE NYSE TSE NASDAQ

Symbol ABH ANS AMCRY ARA BKI CFP CSAR

Head Office Canada Canada Australia Brazil United States Canada United States

Cascades Catalyst Deltic Timber Domtar Graphic Packaging Interfor International Paper Kimberly-Clark Kimberly-Clark Mexico Louisiana-Pacific

TSE TSE NYSE NYSE NYSE TSE NYSE NYSE OTC NYSE

CAS CTL DEL UFS GPK IFP.A IP KMB KCDMY LPX

Canada Canada United States Canada United States Canada United States United States Mexico United States

MeadWestvaco Mercer International Packaging Corp. of America PH Glatfelter Plum Creek Timber Pope Resources Pope and Talbot Potlatch Rayonier Rock-Tenn Sappi Schweitzer-Mauduit SFK Sino-Forest Corp. Smurfit-Stone Sonoco Stora Enso St. Joe Svenska Cellulosa Tembec Temple-Inland Timberwest Universal Forest Products UPM-Kymmene Votorantim Cellulose Wausau Paper Corp. West Fraser Timber Weyerhaueuser

NYSE NASDAQ NYSE NYSE NYSE NASDAQ OTC NYSE NYSE NYSE NYSE NYSE TSE TSE NASDAQ NYSE OTC NYSE PINK TSE NYSE TSE NASDAQ OTC NYSE NYSE TSE NYSE

MWV MERC PKG GLT PCL POPE PTBTQ PCH RYN RKT SPP SWM SFK.UN TRE SSCC SON SEOAY JOE SVCBY TMB TIN TWF.UN UFPI UPMKY FBR WPP WFT WY

United States Canada United States United States United States United States United States United States United States United States South Africa United States Canada Canada United States United States Finland United States Sweden Canada United States Canada United States Finland Brazil United States Canada United States

Primary forest products Pulp, paper Panels Packaging Pulp Specialty fiber Lumber, pulp Recycled fiber, packaging Recycled fiber Pulp, paper Timber, lumber Pulp, paper Packaging Lumber Pulp, paper, packaging Consumer tissue Consumer tissue Engineered wood products Pulp, paper, packaging Pulp Packaging Specialty paper Timber Timber Lumber, pulp Timber, pulp Timber Packaging Pulp, paper Specialty Paper Pulp Timber Packaging Packaging Pulp, paper, packaging Timber Pulp, paper, packaging Lumber, pulp Pulp, packaging, lumber Timber Lumber remanufacturing Pulp, paper Pulp, paper Paper Lumber, pulp Timber, lumber, pulp

2008 sales (US$ 106) 6 771 359 9 235 1 911 826 2 466 820 3 792 1 746 130 6 394 4 079 437 24 829 19 415 2 091 1 376 6 637 1 060 2 361 1 273 1 182 28 841a 440 1 232 2 839 5 863 768 532 901 7 042 4 122 16,227 264 16 965 2 243 3 884 164 2 232 13 920 1 366 1 192 3 010 6 610

a

Due to restructuring starting in November 2007, sales numbers for Pope and Talbot are from 2006.

Despite its widespread use, the CAPM has not received empirical support in several studies (see Fama and French (2004) for a comprehensive review). In an attempt to alleviate these shortcomings, several competing multifactor models have been developed. Although limited in number, some of these multifactor models have been employed in forestry. Based on arbitrage pricing theory (Ross 1976), Sun and Zhang (2001) developed a multifactor model and applied it to several forestry-based portfolios. They found that the

multifactor model had more explanatory power than the simpler one-factor CAPM. In their analysis of Canadian paper and forest product companies, Sadorsky and Henriques (2001) reported similar findings. However, both of these studies used returns based on portfolios instead of individual securities. This practise can be questioned, as it leads to a lack of precision in model testing (Ang et al. 2008). Moreover, to date, no study has applied the three-factor model attributed to Fama and French (1993, 1996) to the forest Published by NRC Research Press

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Table 2. Seemingly unrelated regressions estimates of CAPM parameters. Company AbitibiBowater Ainsworth Amcor Aracruz


Buckeye Technologies Canfor Caraustar Industries Cascades Catalyst Deltic Timber Domtar Graphic Packaging Interfor International Paper Kimberly-Clark Kimberly-Clark Mexico Louisiana-Pacific MeadWestvaco Mercer International Packaging Corp. of America PH Glatfelter Plum Creek Timber Pope Resources

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