Modeling the selection of comparable firms: A novel approach for business valuation in ASEAN nations

Abstract

This study aims to develop systematic models for the selection of comparable firms for firm valuation. The conventional approach argues that indicators such as firm size, growth rate, and industry should be considered for the selection of peer firms. However, this is sometimes very difficult for appraisers because it is almost impossible to find firms that capture all these criteria, especially in developing countries. Guided by business valuation theory, three indicators-profitability, earnings growth rate, and systematic risk-are applied by this study to build systematic models that simultaneously consider the many criteria affecting firm value. Using firm-level data from nonfinancial enterprises with 18,418 firm-year observations collected from the six ASEAN nations' stock exchange markets from 2010 to 2020, this study contributes to business valuation literature by developing systematic models for the selection of comparable firms. The results of this study are also practically significant for valuers because our models can be applied to peer group selection as well. Additional analysis shows that our models are more appropriate or suitable than models from previous conventional approaches that use the same industry or same firm financial characteristics.

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