Author(s):
1. Milan Glišić, Serbia

Abstract:
Equity markets are important source of funding business operations, investment projects and entrepreneurial activities in developed world. However, this is not the case in Southeast Europe, where stock prices are still far below levels reached in 2007 before U.S. subprime mortgage crisis and often below the book values of equity per share. This fact surely discourages firms to issue shares and seek funds from outside investors on stock markets. Our paper examines the relationship between market capitalization and book value of common equity for companies in several transition economies of Southeast Europe between 2010 and 2012. The focus is on real sector companies listed on Zagreb Stock Exchange (ZSE), Belgrade Stock Exchange (BSE), Banja Luka Stock Exchange (BLSE) and Macedonian Stock Exchange (MSE), whose ordinary shares are constituents of regional stock indices CROBEX 10, BELEX 15, BIRS and MBI 10. We test statistical significance of relations between price to book value (P/BV) multiple of these companies and various indicators of their performance, financial position, dividend policy and overall risk. P/BV multiple emerges as a ratio of market capitalization to book value of common equity. While markets yield one estimate of the value of stockholders’ equity, accountants usually produce a different appraisal of the same firm’s net worth. The market capitalization reflects market’s expectations of the company’s future earning power and future financial position. On the other hand, the book value of equity represents the difference between the book value of assets and the book value of liabilities and is significantly influenced by original price paid for assets in the past. The accounting rules and conventions also play a large role in shaping the book value of firm’s net worth. We use activity ratios, liquidity ratios, solvency ratios, profitability ratios and cash flow ratios to measure firm’s performance and financial position. Indicators of dividend policy are dividend-related quantities and some valuation ratios, such as dividend payout ratio, retention rate and dividend yield. Standard deviation and regression beta coefficient are used as possible measures of total risk and systematic risk, respectively. The valuation and financial reporting quality implications arising from conducted research are also thoroughly discussed.

Key words:
price to book value multiple, return on equity, dividend payout ratio, financial position, risk.

Date of abstract submission:
14.09.2013.

Conference:
REDETE 2014 - Researching Economic Development and Entrepreneurship in Transition Economies