The Effect of the Profitability on the Valuation Models: Evidence from Italian Acquisitions

Anna Maria Fellegara,Marco Angelo Marinoni

doi:10.5539/ibr.v12n5p95

Abstract

The aim of this study is to analyse the behaviour of the book-to-market index, B/MV, on a sample of Italian listed companies that completed a M&amp;A operation in the span 2008-2016, the decade of the economic-financial crisis. Moreover the authors&#39; interest in investigating the relationship between the market index and the income and non-earnings performance index. The study has verified whether the listed Italian companies sampled have book-to-market indices in line with corporate performance in terms of profitability, and therefore of general economic, patrimonial and financial equilibrium. The intention is to consider if the market manages to &quot;capitalise&quot; corporate trends regularly and with what intensity. The hypothesis concerns the possibility that the B/MV may be more affected by financial market externalities than by the specific economic and financial outlook in terms of market capitalisation. The profound geopolitical and macroeconomic changes of the last few decades and the consequent multiple corporate crises, have undoubtedly called into question the validity and reliability of certain valuation assumptions.

Highlights

Publication of the International Valuation Standards, IVSs, along with adherence to the Code of Ethical Principles for Professional Valuers issued in 2011 by the International Valuation Standards Council, IVSC, has rekindled significant debate in doctrine and practice on how to estimate and calculate the basic parameters of valuation models, such as the discount rate in the different configurations
Following the above-mentioned survey lines, the study has verified whether the listed Italian companies sampled have book-to-market indices in line with corporate performance in terms of profitability, and of general economic, patrimonial and financial equilibrium, especially during the decade 2008-2016, after the economic and financial crisis, characterised as it was by M&A corporate reorganisation decisions such as mergers
The underlying hypothesis concerns the possibility that the book-to-market index may be more affected by financial market externalities than by the specific economic and financial outlook in terms of market capitalisation

Summary

Introduction

Publication of the International Valuation Standards, IVSs, along with adherence to the Code of Ethical Principles for Professional Valuers issued in 2011 by the International Valuation Standards Council, IVSC, has rekindled ( in Italy) significant debate in doctrine and practice on how to estimate and calculate the basic parameters of valuation models, such as the discount rate in the different configurations (i.e. asset side and equity side). The Italian IVSs, the so-called PIV, devote much room to indirect criteria based on the discounting of future income or financial flows for company valuations (see in particular Italian PIV III.1.31 - .32).

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