A Study on Fundamentals as Determinants of Firm Value under Restriction of Size, Governance and Diversification

Abstract

Firm value is present value of future cash flows expected from the firm – a basic theory of corporate valuation. Fundamental analysis is the one in which they try to find out variables that determine corporate cash flows and/or discount factors. We are especially interested in the role of size, governance and diversification in determination of firm value by fundamentals. We use Korean listed firms for our test. We document that firm value is positively and very significantly explained by fundamentals. Variables that are related to cash flows and/or discount factors are also found to significantly explain firm value. In addition, firm size and governance significantly affects firm value. Diversification strategy, however, is not significantly explaining firm value. It shows negative significance only in combination with R&D. In addition, our finding support that more cash flows and more R&D by larger firms will lead to higher firm value, and R&D by more diversified firms decreases firm value. Our findings would be helpful in designing good corporate policies on management of cash flows or capital structure to boost up firm value, or in managing stock portfolios.