Valuation in Emerging Markets: Investigating the Effects of Country Risks on Corporate Valuation

Frederik Robert Falkentoft & Jonas Nyholm Persson

Student thesis: Master thesis


The aim of this paper is to address the gap between two opposing school of thoughts in the valuation of emerging market (EM) firms, i.e. the unconditional cash flow approach vs. the country risk-adjusted discount rate. Through a comprehensive literature review, we find that no current consensus on a single best practice exist. Instead, academics and practitioners are split between these two primary valuation methods. Previously, few practical studies have been conducted in this field, leaving especially the unconditional cash flow approach untested. As a result, through a case study of four Argentine oil and gas, and steel companies, we compare the performance of the two approaches. To illustrate the unconditional cash flow approach, we apply a relatively new and untested variant, named Extreme Scenario Framing (ESF) by Periero (2009). Our results from the unconditional cash flow approach show that particularly its increased flexibility allows it to more dynamically, and hence accurately, account for country risks. However, our results also reveal that it is rarely implemented in practise, since it is especially weakened by the lack of a clear framework, high complexity, and strong subjectivity. In opposition, we found that a country risk adjusted discount rate is favored by practitioners, as it is easy to implement, but is prone to over-discounting firm values, especially among more internationally diversified EM-firms. Therefore, by developing a relatively simple probability estimate for the unconditional cash flow approach, we aim to make it more accessible to practitioners, and inspire academics to develop it further.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2019
Number of pages149
SupervisorsBjörn Preuss