The financial-economic crisis and value of equity capital: A case study of Slovenian public limited companies 2006-2011

The purpose of this paper is to discuss the effect of financial-economic crisis on the equity value of companies, as well as present the importance of fair and honest company valuations. The fundamental value of equity capital of a company is important for both management and external shareholders. The wide disparity between market and fundamental values can lead to high value adjustments, which reduces investors confidence in the capital market. This has had a negative impact on the operations of financial institutions, and individual as well as company investment; especially on developing financial markets during a financial-economic crisis. This research was designed to assess the equity value of Slovenian public limited companies based on the discounted free cash flows to equity and comparing it with market value of equity capital of companies before and during the financial-economic crisis. The fundamental value of equity capital of the selected companies (sample of 25) is calculated using a two-tiered model. The paired-sample t-tests method rejected the hypothesis that the fundamental value of equity capital of Slovenian public limited companies better reflects the market value of equity capital in today’s times of financial-economic crisis (2011) than before the crisis (2006). However, we found that the market value of equity capital in relation to the fundamental value of equity capital of the selected companies was lower in 2011 than in 2006. Various models of the basic calculations are used in the model evaluation. This study shows the problem of company valuation on small and emerging capital markets which have a short history of data. 2013 Elsevier Ltd. All rights reserved. 1. The financial-economic crisis and equity value of companies In recent years a number of companies have closed down (see Janeš & Dolinšek, 2010), the level of unemployment has drastically risen (see Laporšek & Dolenc, 2012), equity indices have been overthrown and some countries are on the verge of bankruptcy due to incorrect monetary policies of central banks. The consequences of this financial crisis could paralyse the global economic system (Norberg, 2009). The market value of equity capital of the majority of Slovenian public limited companies on the stock exchange has therefore decreased. In times of economic boom the market value of companies was incredibly high. The large difference between the market value and fundamental value of equity capital was proven by Stubelj (2010) who in his research stated that market values can be higher due to: (a) investors who have ‘‘insider’’ information about the company increasing share prices; (b) expected high acquisition value of the company; (c) purchasing of shares for too high prices (for speculative reasons) in order to sell the company for a higher price; (d) lack of investment opportunities for the investor on the Slovenian capital market. These factors have contributed to a dramatic decrease in value during times of financial-economic crisis (from 2008 onwards). The effects of the financial-economic crisis which have severely shook and swung the global financial markets causing share prices on the stock market to fall, have also been felt in Slovenia. The share prices of Slovenian companies have decreased a lot more than on some more developed financial markets. This can be seen on the stock market index; the Slovenian stock market index decreased by 60% between 2007 and 2012 (LJSE, 2012), whereas on the developed financial markets like Dow Jones, NYSE, S&P, the stock market index decreased by only 15%. On the financial market NASDAQ the stock market index even increased by 8% in 2007 (MWatch, 2012). Market price of shares shows how much investors are willing to pay for shares on the basis of expected benefits of ownership. The benefits are expected cash flows belonging to the owners of equity (shareholders). Due to market imperfections and perceived expectations of investors, there is a discrepancy between the market price of the company and its internal (fundamental) value. The internal value is a value based on a comprehensive analysis and assessment of a company. It is expressed as the current value of all the company’s expected cash flow from doing business, 0957-4174/$ see front matter 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.eswa.2013.07.055 ⇑ Corresponding author. Tel.: +386 40450090. E-mail address: [email protected] (A. Trunk). Expert Systems with Applications 40 (2013) 7562–7570