The reliability of valuation methods used by investment banks in emerging markets relative to the market trading prices; a case of the Kenyan market
With the increasing interest in investment in the emerging/developing markets, valuation is gaining greater importance. It ensures that both buyers (acquirers) and sellers achieve value for their investment. Valuation is an art or science of estimating the value of a particular interest in property for a specific purpose at a particular moment in time taking into account all features of the property and also considering all other market factors. The complication regarding income attributable to equity holders has led to a number of models and this study sought to test two of this valuation models There are practical problems in firm valuation due to uncertainty and the instability surrounding income attributable to equity holders. Given the high risks of the Kenyan market and increased interest of investors in this market, it is of great importance to research on how practitioners carry out valuation in Kenya and the extent to which their work can be relied on. The objective of the study was to determine the reliability of the valuation methods used by investment banks in the Kenyan market. The findings were that when the market values were compared with the equity values derived from discounted free cash flow method, the regression resulted in an R2 of 0.31 within a confidence level of 95%. The market value when compared with equity value derived from the economic value added model derived an R2 of 0.01 and the p-value was more than 0.05. The conclusion was that the cash flow model is a more reliabe indicator of the market equity value while the economic value added model is not a good indicator of the market equity value.
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