||A Study of the Effectiveness of the Fundamental Stock Valuation Model in Taiwan
||A Study of the Effectiveness of the Fundamental Stock Valuation Model in Taiwan
||Institute of International Management (IIMBA--Master)
Discounted cash flow
Taiwanese stock market.
Studies into the workings of the world’s stock markets have been conducted for many years. Since the first groundbreaking studies done on the Efficient Market
Hypothesis, a vast amount of attention has been paid to stock valuation models. The study examines which models are preferred and used in the investment industry as well as their effectiveness. The research indicates that one model; the Free Cash Flow to Firm, Discounted Cash Flow model has not received much academic attention.
This paper provides an objective version of the Free Cash Flow to Firm, Discounted Cash Flow stock valuation model. The model is adapted to maintain its objectivity and facilitate empirical testing. The study also provides a framework by which the model can be empirically tested.
The results of the testing indicate that the model is able to correctly value overpriced and correctly priced stocks, and value stocks correctly with relation to each other. It was not able to correctly value undervalued and correctly valued stocks though. This could be because of a number of reasons relating to over simplification used in the assumption of the model. The value of the research for professional use and further research is discussed.
TABLE OF CONTENTS III
LIST OF TABLES VI
LIST OF FIGURES VII
CHAPTER ONE INTRODUCTION 1
1.1 Research Background and Motivation. 1
1.1.1 The History of Financial Market Research. 1
1.1.2 Reasons for Conducting Financial Market Research. 2
1.1.3 Reasons for Continuing Financial Market Research. 4
1.2 Research Questions and Purpose. 4
1.3 Research Structure and Implications. 5
CHAPTER TWO LITERATURE REVIEW 6
2.1 The Efficient Market Hypothesis. 6
2.1.1 Efficiency Studies Conducted in Taiwan. 9
2.2 Stock Valuation Models. 12
2.2.1 Absolute Valuation. 12
2.2.2 Relative Valuation. 17
2.3 Stock Valuation Model Use. 19
2.3.1 Which Stock Valuation Models are Used. 19
2.3.2 Testing Stock Valuation Models. 20
2.3.3 Stock Valuation Testing in Taiwan. 22
2.4 Risks Involved with Stock Valuation Models. 23
CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY 25
3.1 The DCF Model. 25
3.1.1 Determining the Cash Flows. 27
3.1.2 Determining the Discount Rate. 28
3.1.3 Determining the Terminal Value. 29
3.2 The Empirical Test of the Model. 31
3.2.1 Hypothesis Formulation. 31
3.2.2 Testing the Hypotheses 32
CHAPTER FOUR RESEARCH RESULTS 36
4.1 Sample Screening. 36
4.2 Price and Valuation Determinant Analysis. 37
4.2.1 Prices and Valuations. 37
4.2.2 Valuation Parameters. 39
4.3 Portfolio Returns. 40
4.3.1 Market Returns. 43
4.3.2 Industry Returns. 44
4.4 Sensitivity Analysis. 50
4.4.1 Industry-Adjusted Sensitivity Analysis. 52
4.4.2 DCF Components/Parameters Sensitivity Analysis. 53
CHAPTER FIVE CONCLUSION AND SUGGESTIONS 56
5.1 Conclusion. 56
5.2 Suggestions. 57
5.2.1 Further Academic Research. 58
5.2.2 Investment Professionals. 59
5.3 A Final Word. 60
Appendix 1: List of TEJ Inputs. 66
Appendix 2: List of Stocks Included in the Sample. 67
Appendix 3: Portfolio Descriptive Statistics 68
Appendix 4: List of Stock Prices, Intrinsic Values and Differences 70
Appendix 5: Comprehensive Data for Hypothesis Tests 73
Appendix 6: Example of DCF Stock Valuation 77
Appendix 7: List of Companies by Recommendation 81
Appendix 8: Sensitivity Analysis Results Tables 84
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