Corporate valuation models and their application to selected Maltese listed companies : an empirical analysis

Abstract

PURPOSE: This study analysed the Corporate Valuation Models applicable to Maltese listed companies and attempted to assess whether any one of the models is preferred as a valuation method. The study also examined how factors such as market efficiency, accounting regulations and the state of economic development of the Maltese islands impact the way corporate valuation is conducted and whether this has an influence of the choice of which model is used. DESIGN: A multi-method strategy was adopted to achieve the objectives of the study. Eight listed companies were selected from the property sector in determining the theoretical equity values by applying the three main Corporate Valuation Models. Subsequently in the qualitative facet, nine semi-structured interviews were conducted with big-four advisors, Chief Financial Officers and stockbrokers. FINDINGS: The quantitative facet of the study shows that the most widely used model selected by research participants has the poorest relationship with equities listed on the stock exchange. On the other hand, participants suggested that they tend to use and compare results across all valuation models when performing a corporate valuation. The main reason of the adverse effects pertained in the quantitative analysis is due to the market inefficiency posed by the local stock market, which assertion was also backed by interviewees. Furthermore, while accounting regulations have an indirect impact on corporate valuation, merger activities and economic developments have a direct effect on the valuation process. CONCLUSIONS: Supported by the contradicting quantitative and qualitative research, the study pertains that there is no dominant valuation model for the selected listed companies. The right valuation model is based on sound judgement and professional scepticism by exerting more weight on the valuation process rather than on the value itself. VALUE: Taking into account the lack of local literature on corporate valuation, the study is a contributor to the process of valuation modelling. Furthermore, as the deviations pertained in the quantitative analysis between share prices and the valuation models are a result of market inefficiency, the study is also fruitful for rectification of market efficiency.