The Valuation of European Financial Firms

Abstract

We extend the recent literature concerning accounting based valuation models to investigate financial firms from six European countries with substantial financial sectors: France, Germany, Italy, Netherlands, Switzerland and the UK. Not only are these crucial industries worthy of study in their own right, but unusual accounting practices, and inter‐country differences in those accounting practices, provide valuable insights into the accounting‐value relationship. Our sample consists of 7,714 financial firm/years observations from 1,140 companies drawn from 1989–2000. Sub‐samples include 1,309 firm/years for banks, 650 for insurance companies, 1,705 for real estate firms, and 3,239 for investment companies. In most countries we find that the valuation models work as well or better in explaining cross‐sectional variations in the market‐to‐book ratio for financial firms as they do for industrial and commercial firms in the same countries, although Switzerland is an exception to this generalization. As expected, the results are sensitive to industrial differences, accounting regulation and accounting practices. In particular, marking assets to market value reduces the relevance of earnings figures and increases that of equity.

The Term Structure of Implicit Discount Rates in Security Valuation

“…The sample excludes financial firms, property companies and investment trusts. This restriction is conventional as the relationship between value and accounting numbers is thought to be very different for financial and industrial firms, although Danbolt and Rees (2001) show that for certain classes of financial companies this is not the case. Firms with double‐class securities (e.g.…”

Analysis of Equity Valuation Models and Target Price Accuracy: An Evidence From Analyst Reports in Indonesia

“…The accuracy of valuations based on actual EPS in Canada, Germany, and Japan was very low, while the performance of valuations based on earnings in France was quite accurate. The findings of Danbolt and Rees (2002) in six European countries (France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom) revealed that the book-value accounting model worked relatively well for companies in the financial sector, while valuations based on large profits were more relevant in countries such as the Netherlands, the United Kingdom, and Italy than the other three countries in their sample. This finding is also supported by Schantl (2016) and Yin et al (2016).…”

Determinants of Commercial Banks' Residual Profitability: An Industry Approach

“…Our main references for the present work are Cheng [2005], and Bowen et al [2002]. Danbolt and Rees [2002] extend the recent literature concerning accounting based valuation models to investigate financial firms from six European countries with substantial financial sectors: France, Germany, Italy, Netherlands, Switzerland and the UK. In most countries they find that the valuation models work as well, or better, in explaining cross-sectional variations in the market-to-book ratio for financial firms as they do for industrial and commercial firms in the same countries, although Switzerland is an exception to this generalization.…”