Profit Expectations of Startups in the Nordics

Abstract: This paper investigates the reasonableness of the expected returns on equity for startups in the Nordics. With a sample of 109 companies listed in Sweden, Norway, Finland, and Denmark, we deduce the market's expected profitability represented by the implied return on equity from a Residual Income Valuation (RIV) model through reverse engineering. The reasonableness of these profit expectations is evaluated through a statistical comparison to how similar companies in a comparable industry groups have performed historically in terms of return on equity. The average historical industry ROEs are hence used as a definition of reasonable expectations of future ROE. From the analysis, we conclude that the stock prices, which are represented by return on equity expectations, are beyond the levels that the historical averages would indicate as reasonable.