The financial-economic crisis and value of equity capital: A case study of Slovenian public limited companies 2006–2011

The purpose of this paper is to discuss the effect of financial-economic crisis on the equity value of companies, as well as present the importance of fair and honest company valuations. The fundamental value of equity capital of a company is important for both management and external shareholders. The wide disparity between market and fundamental values can lead to high value adjustments, which reduces investors confidence in the capital market. This has had a negative impact on the operations of financial institutions, and individual as well as company investment; especially on developing financial markets during a financial-economic crisis. This research was designed to assess the equity value of Slovenian public limited companies based on the discounted free cash flows to equity and comparing it with market value of equity capital of companies before and during the financial-economic crisis. The fundamental value of equity capital of the selected companies (sample of 25) is calculated using a two-tiered model. The paired-sample t-tests method rejected the hypothesis that the fundamental value of equity capital of Slovenian public limited companies better reflects the market value of equity capital in today’s times of financial-economic crisis (2011) than before the crisis (2006). However, we found that the market value of equity capital in relation to the fundamental value of equity capital of the selected companies was lower in 2011 than in 2006. Various models of the basic calculations are used in the model evaluation. This study shows the problem of company valuation on small and emerging capital markets which have a short history of data.