Novel Perspectives on Market Valuation of Firms via Functional Regression

Abstract

The primary objective of this paper is to evaluate the association between market value and cash flow ratio, and to understand how economic instability alters it. Because this relationship is cross-temporal and may change if other financial indicators are considered, we model this relationship via multiple functional linear regression. We conclude from our multiple sectors study that market value ratio is affected by or follows cash flow mostly during the same time period and that this association weakens considerably under economic instability. We also show that for some industry sectors, while other financial indicators may drive market value, cash flow is likely to be the key player in most sectors.

Multiple Functional Regression with both Discrete and Continuous Covariates

“…Previous studies on multiple functional regression (Han et al, 2007;Matsui et al, 2009;Valderrama et al, 2010) assume a linear relationship between functional covariates and responses and model this relationship via a multiple functional linear regression model which generalizes the model in Ramsay and Dalzell (1991) to deal with more than one covariate variable. However, extensions to nonparametric models have not been considered.…”