Corporate Valuation Models Applicable in a Small Stock Market: A Maltese Perspective

Konrad Farrugia, Kyle Bonello, Peter J. Baldacchino
International Journal of Finance, Insurance and Risk Management, Volume 9, Issue 1-2, 21-47, 2019
DOI: 10.35808/ijfirm/188


Purpose: This paper analyses the applicability of three main Corporate Valuation Models (CVMs) to Maltese listed companies by assessing the extent to which such models - the Income, Relative, and Asset-Based ones - produce accurate results in terms of quoted share prices. Furthermore, it examines whether factors such as accounting regulations, market efficiency and other factors in a small island-state such as merger and acquisition activities may be impacting corporate valuation, including the method chosen. Design/Methodology/Approach: A multi-method explanatory strategy is adopted involving (i) the calculation and quantitative analysis of the theoretical equity values of eight listed property companies according to each method, this being followed qualitatively by (ii) nine semi-structured interviews with Big Four representatives, Chief Financial Officers and financial analysts. Findings: Results indicate that, while the Income Model was most widely used by respondents, it had the weakest correlation with share prices, respondents also attributing this to the adverse impact from market inefficiency on the share price within the small stock market. Contrastingly, the Relative Model, investigated by the use of a Generalised Linear Model, yielded the strongest relationship with share prices. Practical Implications: Respondents did not consider this method its own being superior to other methods but suggested that it is to be used in congruence with the Asset-Based Model which also had a not-so-strong correlation with share prices. Respondents perceived accounting regulations as enhancing trust and accountability during the valuation process although no quantitative evidence emerged that this factor or others such as merger activities had any direct correlation with share prices. Originality/Value: The study concludes that there was no single dominant valuation model for the selected listed companies. It also questions the applicability of such CVMs in a small island-state, and indicates that a small stock market with its illiquidity and inefficiency can be easily affecting share price values, this evidently being a main contributor to the larger-than-expected variations of market pricing with the theoretical value calculated through any CVM.

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