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Dramatic stock market gyrations during and since the 1990s have encouraged advocates of behavioral-finance theories, which hold that market values can systematically deviate from economic fundamentals. Evidence shows, however, that such events are limited and that market values eventually return to fundamental levels.
Managers and investors need to understand the market’s swings away from economic fundamentals—rare as those swings may be—to assess the long-term value of companies and to time strategic decisions appropriately.
This article is one of three adapted from the new edition of Valuation: Measuring and Managing the Value of Companies, by Tim Koller, Marc Goedhart, and David Wessels. To read the others, click on the links below: Don't expect too much of your share price Companies are what they are, not what their executives want them to be perceived as being. But management can improve the match between share prices and intrinsic value. Measuring long-term performance Earnings per share and share prices aren't the whole story—particularly in the medium and long term.
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