Determinants of Price Multiples for Technology Firms in Developed and Emerging Markets: Variable Selection Using Shrinkage Algorithm

Abstract

Globally, technology firms are characterized by high level of innovation, rapid obsolescence of technologies, high investment risk and unpredictability of future cash flows. All these make conventional discounted cash flow valuation methods inadequate for valuation of technology firms. This study aims to develop sector regression models for relative valuation of technology firms by evaluating firm-level determinants of price multiples. Results suggest that price to book is the most appropriate multiple for valuing developed market technological firms, whereas price to sales is the most apt multiple for emerging market firms. Variable selection by least absolute shrinkage and selection operator (lasso) validates that growth rate, research intensity and cash holding influence value of price multiples for both developed market and emerging market firms. Similarly, smaller firms tend to generate higher value of the multiples under both categories. Firms’ ESG practices is an important determinant of price multiples for developed market firms, however, it does not influence the multiples’ value for emerging market firms.