Factors of Undervaluation and Overvaluation of Stocks Towards the Relative Value of the Company

The international integration of markets and the rising challenge of competing have led to a growing interest in the key drivers of the shares market value. Management makes strategic decisions based on these drivers, while investors identify potential companies to invest in. Usually the attention of academic researches and practitioners is drawn to the fundamental indicators of a company performance. However, analysis of only fundamental financial factors does not consider legal, social, reputational risks and risk of the corporate governance. High quality of corporate governance leads to an increase in the companies’ investment attractiveness and efficient use of borrowed and own capital. This paper has relevant implications for empirical analyses on the relationship between company relative value and key value drivers, including financial and non-financial factors. Research on value determinants was conducted using five market multiples: P/E, P/BV, P/S, EV/S, EV/EBITDA. Financial variables for each multiple were identified by fundamental analysis. The corporate governance quality, government participation in business, the company size and its age were used as non-financial factors. The corporate governance quality index was divided into audit score, board of directors score, shareholder rights score, compensation score, disclosure score, CEO duality. Based on a sample of companies operating in developed and emerging markets with data covering 2017, multifactor regression models were formed for each multiple. Since the sample was used for two different markets, a dummy variable of country was included to the equation. It was a measure of the country risk caused by different economic and political market conditions. According to the results of research the fundamental variables have the most significant effect on the share market value. Also, better quality of external audit leads to an increase in the relative value of the company. Generally, the corporate governance quality assessments demonstrated ambiguous results. It was caused by the variety of factors having a multidirectional effect included in one score, also there was a time lag between the corporate governance quality improvement and the share price reaction. It is worth noting that the expansion of the government and the company size negatively affect the multiple values.