Priit Sander

Valuation of private companies by Estonian private equity and venture capitalists

Purpose – The paper aims to investigate the views of Estonian private equity and venture capitalists about the valuation of high‐growth companies and compare these with theoretical recommendations found in corporate finance and venture capital literature.Design/methodology/approach – The analysis was carried out by using the case study methodology. Structured interviews were conducted in order to present the material for analysis. The dominant model of the case study analysis is exploratory, using an explanation‐building and pattern‐matching technique.Findings – Main findings of the empirical study show that Estonian private equity and venture capitalists make the valuation somewhat differently compared to Western European and American ones. Some findings do not confirm the suggestions made by scientists.Research limitations/implications – Some of the required data were considered to be a business secret. The research could be extended to a broader sample.Practical implications – The findings can be used ...

The impact of financial leverage on risk of equity measured by loss-oriented risk measures: An option pricing approach

Abstract We investigate how financial leverage influences the risk of equity in companies with limited liability. In our study, the risk is measured by loss-oriented risk measures (VaR, downside deviation, etc.). Also, the dependence of the risk premium on risk is under consideration. VaR-based and downside risk measures are considered in similar frameworks, and risk premium is introduced which is symmetrical to these risk measures. The value of equity is modeled by the price of a call option. In most cases there is a positive relationship between the level of leverage measured by the debt ratio and the risk measured by the loss-oriented risk measures. However, there exist exceptions. The risk premium is not a linear function of the risk. Still, for a reasonable range of leverage, the dependence of the risk premium on risk is approximately linear in most cases.

The Distributed Profit Based Corporate Taxation, and the Valuation of Cash Holdings

The topic of corporate cash holdings has gained a lot of attention in academia recently. The current paper investigates the valuation of cash holdings under distributed profit-based corporate taxation. We show that the cash-to-assets ratio has increased considerably since the introduction of distributed profit-based taxation in Estonia. Almost 1/3 of all the companies in Estonia had cash-to-assets ratios above 50% in 2011. We argue that in order to value such cash holdings, a discount at a size of tax burden associated with profit distribution should be used both in case of cash as well as cash equivalents.

Tax Heterogeneity and Trading Volume Around the Ex-Dividend Day: Estonian Evidence

This paper examines the trading pattern around the ex-dividend day in the Estonian stock market between 2000 and 2006. An analysis of the Estonian income tax law confirmed that despite its simplicity there exists differential treatment of capital gains and dividends as well as tax heterogeneity among investors. An empirical analysis of the trading data showed a statistically significant abnormal trading volume around the ex-dividend day. By putting these two aspects together and investigating short-term changes in ownership structure around the ex-dividend day it can be concluded that in the Estonian stock market investors use dynamic tax-induced trading strategies around the ex-dividend day. The occurrence of the learning effect and avoidance of transaction costs were also revealed by an analysis of these transactions.

CAPM versus expert opinion: Do practitionersÕ perceptions meet theory? Evidence from the survey of Estonian commercial real estate market

According to finance theory, several methods (either direct or indirect) can be used to calculate investor’s required rate of return. In case of direct method, the value of required rate of return will be given by investors themselves, which depend heavily on investors’ levels of risk aversion. In case of indirect methods, the required rate of return is calculated using current or historic data. The major difficulty here is that actual required rate of return cannot be observed from market data and that is why scholars have to estimate different rates of return, using various techniques. One of the most well-known and widely used methods in theory and also in practice for estimating required rate of return of an investment is capital asset pricing model (CAPM).Although widely used, CAPM has still got a quite heavy criticism by several. Therefore, the authors of the paper have an intention to test the correctness of the estimation of long-term rates of return, calculated by CAPM on real estate market experts in Estonia. Real estate market has chosen as the test-market sector because of its explicit framework. Estonia as a test-country has been chosen because of the secondary intention to prove the applicability of CAPM also on smaller markets. The aim of the authors of the paper is to compare coherence between the expert opinion and the theoretical calculation of the most appropriate long-term rates of return for commercial real estate projects on the example of Estonian real estate market. Knowingly to the authors, there has been not done similar kind of survey so far, implying to the possible gap in the literature.The survey findings show that the results acquired through the questionnaire conducted among real estate appraisers, investors and consultants in Estonia verify the correctness of the result of required rate of return obtained by CAPM, based on long-term historic data. Based on both results, the average long-term required rate of return of a typical market participant, considering typical commercial real estate in Estonia, is rounded to 9%.