Valuation in emerging markets: The applicability of conventional valuation techniques under the economic conditions of developing countries

Moritz David Gimpel

Student thesis: Master thesis


Conducting valuations in emerging markets is a complex issue as the popular conventional models, namely Discounted Cash Flow and Multiple valuation, are inappropriate to deal with the specific conditions faced in such countries. These tools were imported by practitioners as “best practises”, yet limited attention was paid whether these techniques are actually applicable in this decisively different context. This thesis analyses the challenges of business valuation in the specific environment encountered in developing countries. The careful dissection of the valuation models shows that they are based on statistical premises and assumptions regarding market efficiencies and investor behaviour, which are necessary to create simplified models, but are highly controversial. In emerging countries, market imperfections combined with limited availability of reliable data series clash with the theoretical foundations and complicate the practical methodology of the common frameworks. Even the adjusted models produced by scholars and practitioners to capture the intricacies of the developing countries do not solve the problem of theoretical inconsistencies and find only unsatisfactory compromises for the methodological hitches. Yet these issues are not only confined to the popular frameworks, as the analysis of the lesser-known toolsets illustrates. Neither the Adjusted Present Value model, nor the more sophisticated Real Options and Monte Carlo Simulation approaches provide fully satisfactory results, yet enrich the discussion by providing different approaches towards valuation. The final conclusion is that practitioners in emerging markets need to invest additional effort in the careful selection of the valuation model, the derivation of input parameters, and in the interpretation of the results. Extensive valuation and business experience, as well as intuition are the key to designing meaningful valuation frameworks – instead of endless chains of complex model adjustments to capture all aspects of reality. Textbooks preach that there is no “right” company value and that practitioners should interpret the outcomes of valuation models as first indications or a range of possible values – a principle which appraisers should take even more seriously in emerging markets.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2010
Number of pages88