Using regression analysis to determine the enterprise value of a company : A Regression Analysis on the Enterprise Value of Companies within the Industry Manufacturing of Chemicals and Chemical Products

Abstract: Valuing a company is a difficult task. At the same time it is also a very important task for a number of reasons, namely when an investor wants to see if a company is under- or overvalued and when a company is to be acquired or sold. The aim of this dissertation is to evaluate which covariates that, in a multiple regression analysis, has significant explanatory value for the enterprise value of a company within the manufacturing of chemicals and chemical products industry. The regression model that is built up is also going to be compared to comparable companies analysis, one of the most common valuation techniques. Furthermore, the usefulness of the regression model within the investment banking industry is going to be evaluated. To do this, financial data from 93 companies is collected and a regression is run on the data. The regression model is then built up based on this and through step-wise elimination of covariates and improvements on the model. Then, the regression model is compared to comparable companies analysis. The results from this indicate that the regression model is marginally better than the EV/EBIT-multiple, and significantly better than the EV/Sales- multiple.  This is not entirely in line with previous studies that have shown that the regression model is significantly better than both the EV/EBIT and EV/EBITDA-multiple, as well as the EV/Sales multiple. The reasons to this could be that non-optimal covariates are used in the study, that the regression model does not work well within the chosen industry, and that too few companies were analyzed. The study shows that the regression model is not very useful within the investment banking industry. The two most important reasons for this are complexity and non-adoptability.  Simplicity and adoptability are two very important words for investment bankers as the client-driven industry is dependent on that the client understands the valuation, and that the valuation can easily be adjusted for company-specific differences. The regression model does not fulfil this. There is, however, a possibility that the regression model could be of better use in more institutional circumstances, such as in in-house corporate finance divisions and for institutional investors.