Leong, Ken Yien * (2022) Bank share valuation: exploring the validity of four models in practice. Doctoral thesis, Sunway University.
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This study is motivated by lack of recent empirical evidence on validity of stock valuation theories in Finance domain as to their ability to (i) explain and (ii) forecast fairly accurately forward prices of one class of shares namely the banking firms. This is a multi-country as well as multi-model research on that gap in knowledge. The aim of this research is to provide a discussion based on current data, using advanced methodology available in recent years at doctoral level research on bank valuation theories/models. The validity of four commonly used theoretical valuation models: 1) Price Earnings Approach, 2) Residual Income Model, 3) Dividend Discount Model and 4) Free Cash Flow, which are widely used in the banking industry are the focus of this thesis. The research gap identified from a review of relevant literature suggests that there is yet a comprehensive study on the validity of major valuation models. Among the vast literature on stock valuation, the focus has been on the much larger number of non-banking firms on the validity of some of the more than 12 theoretical models as reviewed. Our findings are about veracity and forecasting ability of theories. Four most-commonly-applied valuation theories are tested using data over 20-years data on banking firms. All four tested theories do hold statistically for all banking stocks; thus, the valuation theories are statistically valid. Using theory-suggested stock price forecasts (using model-suggested parameters estimated from in-sample data over prior years) over five forward years and then comparing with the actual market prices, it is found the forecast stock prices and the actual prices are very close as observed by Inefficiency Coefficient. These key findings relating to (i) explainability of the four theories-suggested variables and (ii) forecastability of these four theories are interpreted as significant new knowledge on banking firm’s behaviour in four economies: Japan; Malaysia; United Kingdom; and United States. The methodology used for research question (i) panel-based regressions, not commonly used in prior studies. As for the forecasting power for question (ii) of the four models, the study followed strictly the latest operating process to set up data variables, estimate model parameters, and then making forecasts over each forward horizon sequentially. One highlight is, in the cases of three developed economies, the near-horizon forecasts are statistically significant at or below 0.10 test values compared to far-horizon forecasts. Meanwhile, in the case Malaysia, the forecasts by at least two theoretical models are able to suggest useful forward forecast prices. The models are able to explain price formation using the theory-suggested variables tested, hence provide important insights on rational economic behaviour of investors. The theories in all four cases are robust to support the four valuation models to explain the price formation over 20-year period relating to stock prices. Finding relating to veracity of the theories in a multi-country context using latest data series is strong vindication that the theories explain price formation of historical prices: significant support for the common usage of these models in industry and academia.
| Item Type: | Thesis (Doctoral) |
|---|---|
| Uncontrolled Keywords: | equity valuation theories; valuation models; bank stocks; forecasating stock prices; veracity of valuation models; multi-country research |
| Subjects: | H Social Sciences > HG Finance |
| Divisions: | Sunway University > Sunway University Business School |
| Depositing User: | Ms Yong Yee Chan |
| Related URLs: | |
| Date Deposited: | 27 Sep 2023 00:36 |
| Last Modified: | 27 Sep 2023 00:36 |
| URI: | http://eprints.sunway.edu.my/id/eprint/2378 |
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