Discount Rates in Emerging Capital Markets

Mongrut, Samuel

doi:10.2139/ssrn.926163

Cited by 2 publications

(1 citation statement)

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“…Due to the illiquidity of the Maltese market, every company within the market should adjust the discount rate for its investors to allow for this risk (Mongrut and Ramirez, 2006). Even though Malta has been given an A-credit rating by Standard & Poor since 2017, only 44% of the participants (4/9) claimed that Malta is a developed country, arguing that it is difficult to compare small island states with strong economies such as Germany and France.…”

Section: The Relationship Between Market Efficiency and Corporate Val...mentioning

confidence: 99%

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

Farrugia,

Bonello,

Peter

2019

ijfirm

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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 largerthan-expected variations of market pricing with the theoretical value calculated through any CVM.

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Section: The Relationship Between Market Efficiency and Corporate Val...mentioning

confidence: 99%