Modeling the selection of comparable firms: A novel approach for business valuation in ASEAN nations

Abstract

This study aims to develop systematic models for the selection of comparable firms for firm valuation. The conventional approach argues that indicators such as firm size, growth rate, and industry should be considered for the selection of peer firms. However, this is sometimes very difficult for appraisers because it is almost impossible to find firms that capture all these criteria, especially in developing countries. Guided by business valuation theory, three indicators—profitability, earnings growth rate, and systematic risk—are applied by this study to build systematic models that simultaneously consider the many criteria affecting firm value. Using firm-level data from non-financial enterprises with 18,418 firm-year observations collected from the six ASEAN nations’ stock exchange markets from 2010 to 2020, this study contributes to business valuation literature by developing systematic models for the selection of comparable firms. The results of this study are also practically significant for valuers because our models can be applied to peer group selection as well. Additional analysis shows that our models are more appropriate or suitable than models from previous conventional approaches that use the same industry or same firm financial characteristics.

Keywords:

• Comparable firms
• Business valuation
• Income-based approach
• Market-based approach

PUBLIC INTEREST STATEMENT

Comparable firms play a vital role in the application of market- and income-based valuation approaches. Our research is motivated by valuation practitioners who commonly use the financial information of peer firms to support their valuation procedures. Although academic literature provides several valuation indicators that could be used by valuers, the process of selection of close peers for the target firms is sometimes a difficult process. Our study develops systematic models that consider many factors simultaneously, so that the process of peer selection is rendered consistent and logical. Significantly, these factors are based on valuation theory, and all the proxy measurements ensure that it is possible for valuers to practically apply the models, especially for situations in which the target firm is a non-listed company. Finally, we demonstrate that our models are more appropriate than those based on the conventional approach. This is also empirical evidence that practitioners can use to convince their clients, when they employ the models.

Acknowledgements

Nguyen Kim-Duc received the “Best Paper Award” for this paper at the 20^th ASEAN Valuers Association Congress organized in Singapore, 2017. He is grateful to Lim Lan Yuan for helpful comments.

This research was funded by the University of Economics, Ho Chi Minh City, Vietnam. We are grateful to two anonymous reviewers and an editor for their helpful comments. The authors would like to thank Teo Li Kim, Tran T.T. Anh, Simon Chan, Milton Tan, Phung T. Binh, Ni L.A. Widyahari, Dato’ Sr L.W. Seang, and Do H. Luat for their support and valuable suggestions. We sincerely appreciate Nguyen N. Quang for his support to the programming code for our additional analysis. We also thank the conference participants at the 20^th ASEAN Valuers Association Congress hosted in Singapore in 2017 for helpful comments. We thank Trinh Tran, Do Han, Le Phong, To Linh, Tran Hop, Nguyen Trien, Duong Uyen, Nguyen Na, Le An, Lam Dat, Che Ly, Le Ha, Chu Han, Le Ly, Doan Anh, Doan Linh, Nguyen Minh, Tran Nhi, Bui Thanh, Le Han, Bui Sang, Dang Yen, Danh Han, Nguyen Dung, and Luong Giang for their support in cross checking data. A previous version of this paper was entitled “Building a model of selection of comparable firms in business valuation: The case of Vietnam.”

Notes

1. There are three approaches used to estimate asset value, including the cost-, market-, and income-based approaches (IVSC, 2019). For business valuation, the cost-based approach is also referred to as the asset-based approach (Pratt & Niculita, 2008).

2. A lower payout ratio also means that the reinvestment rate will be higher.

3. The previous version only determined four peer firms. Cooper and Cordeiro (2008) find that the average accuracy of using ten close peer firms is as similar to using all comparable firms in the same industry. Hence, we enhance accuracy with ten peer companies.

4. These variables are computed using the estimated coefficients from the prior year’s regression, and accounting or market-based variables from the current year.

Additional information

Funding

This research is fully funded by the University of Economics Ho Chi Minh City, Vietnam.

Notes on contributors

Nguyen Kim-Duc

Nguyen Kim-Duc is a lecturer at the Department of Valuation, School of Economics, University of Economics Ho Chi Minh City (UEH). He is a valuer licensed by the Ministry of Finance and a professional advisor to many valuation firms in Vietnam. He holds an M.Sc. degree in Finance, and two separate B.A. degrees in Audit and Valuation. His main research interests include valuation of businesses and intangible assets, asset pricing, and business valuation modeling.

Hay Sinh

Hay Sinh is a lecturer in business valuation at the Department of Valuation, School of Economics, UEH. She holds a PhD in Finance, an M.Sc. degree in Management, and a B.A. degree in Industry Economics. Her main research interests include business valuation, intangible asset valuation, and economics.

Tran Bich-Van

Tran Bich-Van is a lecturer in intangible asset valuation at the Department of Valuation, School of Economics, UEH. She holds an M.Sc. degree in Management, and a B.A. degree in Statistics. Her main research interests include intangible asset valuation and international economics.