An artificial neural network based method for company valuation

Abstract

Purpose - Company value is a crucial issue for everyone operating in financial markets. Both firm managers and investors should calculate the value of a firm, and there are many methods available to do so. Calculating valuation methods is challenging due to the multiple parameters and stages that are involved. Due to these reasons, it's possible for managers, owners, investors, and other stakeholders to estimate a company's value inaccurately or with difficulty. The main objective of this essay is to demonstrate how to evaluate a company's value using the NARX model as an alternative to other models. Methodology – It is estimated that the firm value using an artificial neural network nonlinear external input autoregressive network model for 50 companies operating in the consumer products and industrial products and services sectors in the Euro Stoxx 50 index. The dataset covers the period from 2000 to 2021, and 20 financial ratios were included as input to the model, with FCFF as the output. Findings- The NARX model with a 20-6-6-1 or 20-10-10-1 network structure provided the best value for both R and MSE at two-time delays. However, the 20-12-12-1 network structure of the NARX model with a time delay of three has a lower error rate after training and the best R value. The model's prediction success rate is 90.82% using the 20-12-12-1 network structure with a time delay of three. Conclusion- As a result, this model can be used by investors and business managers to value a company. By using this method, businesses may gain access to more precise and unbiased appraisals that can guide resource allocation and strategic decision-making. By including macroeconomic factors that have an impact on the sector and employing a longer time frame, the study could be improved. Keywords: Company value, company valuation, cash flow to firm, artificial neural networks, nonlinear external input autoregressive network JEL Codes: C45, C80, G12