Influencing Factors of Enterprise Market Value: History
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Contributor:
Yuanbo Qiao
,
Xiaoyan Shao
,
Zhuolin Han
,
Hao Duan

Enterprise value is an important characterization of the state of a company, which is closely related to its investment decisions and also affects the performance of the stock market, and it thus receives a great deal of attention. To improve resource allocation efficiency and government management, research on firm values is necessary. 

  • enterprise market value
  • dividend discount model
  • knowledge capital
  • physical capital
  • labor

1. Introduction

Enterprises are an essential part of the economic system. Firms use different kinds of factors, such as labor, physical capital, and technology, to produce goods and services; at the same time, they pay wages and interest and earn profit, which are the main sources of consumption and investment. To improve resource allocation efficiency and government management, research on firm values is necessary. In the new era, knowledge capital and other kinds of intangible capital play more and more important roles. Investigating the impact of different kinds of investments, especially investments in knowledge capital, on firm value has not only academic value but also practical value. On the one hand, the study of enterprise market value can provide appropriate guidance for real-world investment decisions, and on the other hand, analyzing the influencing factors of enterprise market value with different methods can help us compare the applicability of different theoretical models.
There has been extensive research on firm value and optimal investment decisions, both from theoretical and empirical perspectives. Several theories, for example, Tobin Q, the multi-capital Q model, the capital asset pricing model (CAPM), investment-CAPM, and intellectual capital theory, were used to analyze the factors influencing firm value and investment decisions [1][2][3][4][5]. Firms in the US, Japan, India, and other regions were chosen to analyze the factors affecting firm value [4][5][6][7][8]. The firm values of Chinese-listed companies have also been analyzed in recent years [9][10][11][12][13]. 

2. Influencing Factors of Enterprise Market Value

Enterprise value is an important characterization of the state of a company, which is closely related to its investment decisions and also affects the performance of the stock market, and it thus receives a great deal of attention. In 1983, Abel built a model to investigate the effect of output price uncertainty on optimal investment decisions that maximized firm values [14]. Then, in 1985, he further examined the relationships among the market value of the firm, marginal Q, and optimal investment rate theoretically [1]. In 1993, Chirinko used a multiple capital Q model to investigate the effect of investment spending and Q. In his model, the three inputs added to the model were inventory, research and development, and labor, which were treated as quasi-fixed factors [3]. Empirically, Hayashi and Inoue used a panel of Japanese listed firms to investigate the relationship between investment and Q [4]. Belo et al. designed a new supply approach for valuation and used the Q theory of investment to pin down the cross-sectional asset prices [15]. By introducing learning, Andrei et al. both theoretically and empirically proved that the investment-Q relation works better for research-intensive industries [16]. In addition, Gonçalves et al. showed that models based on investments in physical capital and working capital can capture the variation in average returns across a large number of portfolios simultaneously [2]. This study also demonstrated that the aggregation of physical capital and working capital in the Investment Capital Asset Pricing Model (ICAPM) helped to explain the variation in average returns across portfolios.
In the modern economy, intangible capital has become more and more important, and research has incorporated intangible capital to explain firm value. A growing body of literature suggests that intangible capital is progressively becoming more important for firms. Hall asserted that unmeasurable intangible capital was an important part of the modern economy [17]; McGrattan and Prescott showed the importance of accounting for intangible assets in the valuation of stock market value [18]. Carrado et al. investigated the importance of considering intangible capital in analyzing economic growth and suggested that intangible capital had made a significant contribution to labor productivity and, thus, economic growth [19]. Li and Liu emphasized the importance of intangible capital for measuring firm values and found that incorporating adjustment costs and investment-specific technological change improved the model performance [20]. Carrado and Hulten discussed the scope, characteristics, and measurement of intangible capital and showed the trend in intangible investment in the US economy [21]. Hansen et al. used securities market data to measure intangible capital and illustrated the importance of intangible capital when measuring firm value [22]. Falato et al. ascertained that the rise of intangible capital made US corporations hold more cash and less debt [23]. Peters and Taylor investigated the intangible capital and investment-Q relationship and found that Tobin’s Q can explain both physical and intangible investment [24].
Several kinds of capital were selected to represent intangible capital, for example, organization capital, customer capital, and brand capital. Eisfeldt and Papanikolaou posited that the intangible capital was embodied in the firm’s key employees’ organizational capital and found that firms with higher organizational capital would be riskier and have higher average returns [25]. Lev and Radhakrishnan viewed organization capital as the major factor in production and often brought firms abnormal returns, thereby incentivizing firm growth, underlining that it was a persistent creator of value and growth for firms. They showed that organizational capital contributed significantly to the explanation of firm value [26]. Gourio and Rudanko examined the impact of customer capital on firm value and investment dynamics, emphasizing the importance of adjustment costs in creating customer capital [27]. Belo et al. studied brand capital, the primary form of intangible capital, and proved that more brand capital-intensive firms had higher stock returns, showing the importance of intangible assets on firm value [28].
Intellectual capital is a kind of intangible capital that refers to collective knowledge and resources and can be categorized as human capital, relational capital, and structural capital. Researchers investigated intellectual capital from different perspectives and viewed it as a source of firm competitive advantage [29][30]. Ni et al. found evidence that for Taiwanese companies, intellectual capital positively affected firm values and suggested firms make efforts to develop intellectual capital [5]. Smriti and Das used the value-added intellectual coefficient model to measure intellectual capital and its components. They found that Indian-listed companies performed better when enhancing intellectual capital [6]. Lin et al. decomposed the firm’s unexpected stock returns into intellectual capital news and expected return news and found that intellectual capital news was the main driver of stock returns and excess stock returns, implying that intellectual capital played an important role in firm stock values [31]. Shafiee used a structural equation model to investigate the impact of intellectual capital on a firm’s competitive advantage and found that intellectual capital increased the competitive advantage by improving business intelligence and brand image [32].
Labor is an important input for production and growth, and the decisions of labor affect firm value. In 1986, Shapiro included labor adjustment costs in his analysis and found that the presence of labor adjustment costs played a key role in matching investment and dynamic employment [33]. However, in 2004, Hall showed that the introduction of excessive adjustment costs in the model setup was ineffective [34]. By analyzing the annual industry data for the US, Hall found that adjustment costs generate relatively small rental costs. This should not be an important factor in explaining the shift in the market capitalization of firms. Merz and Yashiv introduced the frictions of the labor market and treated labor as a quasi-fixed factor that affected firm value. The optimal hiring and investing determined the firm profit and, consequently, the firm market value [35]. Belo et al. studied the impact of labor market frictions on asset prices and found that, due to the adjustment cost, a 10% increase in a firm’s hiring rate would cause a 1.5% decrease in its risk premium [36]. Barkai used data on labor compensation in the US economy to track labor productivity and showed that after 1980, increases in labor productivity were accompanied by equally sized increases in labor compensation. The decline in the labor share was caused by sustained productivity growth and stagnant pay [37].
Recently, some researchers studied the factors influencing Chinese firm values. Li found that the development of the digital economy enhanced firm value [9]. Based on a text analysis method, Huang et al. empirically proved that the digital transformation increased Chinese listed firms’ value by increasing their innovation ability, factor allocation efficiency, and risk management [10]. Xu et al. found that increasing information density brought higher firm value, and social trust positively moderated the relationship [11]. Chen et al. investigated the capital–labor elasticity of substitution, biased technological progress, and factor-relative income shares of Chinese industrial firms and proved that changes in factor-relative prices affected their income shares. The results proved that changes in factor-relative prices affected factor-relative income shares mainly through direct ways and, to a lesser extent, through indirect ways [12]. Yan and Kong studied the effect of managerial competence on the enhancement of enterprise value and proved that a free and equal, neutral competitive environment and the enhancement of managerial competence were important means to increase enterprise value [13].
Studies have been conducted to analyze enterprise value both theoretically and empirically, and some valuable conclusions have been drawn. In terms of models, the portrayal of corporate behavior has become more and more detailed, the classification of capital has become more and more rational, and the importance of intangible capital has been recognized. In terms of empirical research, more and more samples have been used for the analysis of enterprise value and the testing of theories.

This entry is adapted from the peer-reviewed paper 10.3390/math11184016

References

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