ORCID Profile
0000-0003-2757-9924
Current Organisations
Sunway University
,
Universiti Putra Malaysia
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Publisher: Informa UK Limited
Date: 21-03-2019
Publisher: Emerald
Date: 03-2022
DOI: 10.1108/IJMF-06-2021-0278
Abstract: The objective of this paper is to investigate the validity of stock valuation theories and their forecasting ability by conducting an empirical study. It employs four most commonly used theories which are then tested using 19-year banking-firm market data. The usefulness of these models demonstrates with promising results. This paper conducts a multi-country study using the multi-model testing approach to evaluate validity of theories and forecast accuracy of banking firms. It employs four methodology models used in finance literature (1) P/E multiples model, (2) accounting-information-based clean surplus model, (3) theoretical model based on Gordon and Shapiro (1956) method and (4) the Damodaran-Kottler Free Cash Flow or FCF theory based on discounting model. The tests show that the four theories under tests have a significant fit with actual price formation. The explained variation ranges from 72 to 92%, so the explanatory power of the theories accounting for variations in bank prices over 19-year period is substantial. The models fit suggest that the P/E model has superior predictive power followed by the RIM, DDM and FCFE. These findings shed new lights on the relative performance of valuation models. The study is limited in terms of the s le period size for 1999–2019. The availability of essential financial data prior to 2000 is very limited, so one can understand interpretation of statistical results under certain assumptions. The paper suggests that one-factor model is better than the two-factor model. The work done in this paper is unpublished and original contribution to banking and finance literature and also not under consideration for publication in any other journal.
Publisher: Emerald
Date: 13-07-2022
DOI: 10.1108/IJMF-06-2021-0291
Abstract: This manuscript reports evidence on how debt-taking decisions of top management in a multi-country setting do affect credit rating scores assigned by credit rating agencies (CRAs) as global monitors of creditworthiness of borrowers. This aspect has been long ignored by researchers in the literature. The purpose of this paper is twofold. A test model is specified first using theories to connect debt-taking behavior to credit rating scores. Once that model helps to identify a number of statistically significant factors, the next step helps to identify threshold values at which the variables driving debt-taking behavior would worsen the credit rating scores as turning points of the thresholds. The study identifies factors driving creditworthiness scores due to debt-taking behavior of countries and develops a correct research design to identify a model that explains (1) credit rating scores and the factors driving the scores and runs (2) panel-type regressions to test model fit. Having found factors driving debt-taking behavior by observed units, the next step identifies threshold values of factors at which point further debt-taking is likely to worsen credit rating risk of the observed units. This is a robustness test of the methodology used. The observed units are 20 countries with data series across 14 years. First, new findings suggest there are about six major factors associated with debt-taking behavior and credit rating changes. Second, the model developed in this study is able to account for substantial variability while the identified factors are statistically significant within the normal p -values for acceptance of hypotheses. Finally, the threshold values of factors identified are likely to be useful for managerial decisions to judge the levels at which further debt-taking would worsen the credit rating scores of the observed units. The observed units are from 20 countries over 14 years of annual data available on credit rating scores (privately obtained from Standard and Poor [S& P]). The s le represents major economies but did not include emerging countries. In that regard, it will be worthwhile to explore the debt-taking behavior of emerging economies in a future study using the methodology verified in this study. The findings help add few useful guidelines for top management decisions. (1) There are actually factors that are associated with debt-taking behavior, so the authors now know these factors as guides for managerial actions. (2) The authors are free to state that the credit rating changes occur on objective changes in the factors found as significantly related to the debt-taking behavior. (3) The threshold values of key factors are known, so top management could use these threshold values of named factors to monitor if a debt-taking decision is going to push the credit rating to a worse score. There are society-wide implications. Knowing that the world's debt level is high at US$2.2 for each gross domestic product (GDP) dollar across almost 200 countries, any knowledge on what factors help drive creditworthiness scores, thus credit riskiness, is revealed in this paper. Knowing those factors and also knowing the turning points of the factors – the threshold values – likely to worsen creditworthiness scores is a powerful tool for controlling excessive debt-taking by an observation unit included in this study (The dataset in this research can also be used to see inter-temporal movement on debt-taking in a future study). In the authors' view, there are many studies on debt-taking behavior. But none has connected debt-taking on how (1) named factors are observable to management that affect credit rating changes and (2) if a factor affects creditworthiness, at which point of the factor value, the creditworthiness will flip to worsen the score. These aspects are seldom found in the literature. Hence, the paper is original with practical value at the global level.
No related grants have been discovered for Mohamed Ariff.