Solving the Valuation Paradox - Applying Hedonic Valuation to Paradoxical Companies

Sammanfattning: Traditional valuation models that are widely used by investors and scholars, for instance, residual income valuation (RIV) model, do not yield accurate results when valuing paradoxical companies, i.e. companies with the market value significantly above the book value and high growth, despite not generating positive payoffs. With the increasing number of paradoxical companies entering the market, there is a need to identify them and estimate their equity value with better accuracy. We expand prior research by defining four simple quantitative approaches to identify paradoxical companies. Also, the approaches can be easily adapted to different markets and economic cycles. This thesis aims to improve the accuracy of pricing of paradoxical companies by applying hedonic regression, an empirical valuation technique previously used on other asset classes, such as real-estate and art. We develop multiple hedonic models that yield promising results for valuation of paradoxical companies, both regarding accuracy and applicability. Our models rely solely on short term historical data and avoid complex calculations (e.g. discount rates), hence are easy-to-use even for investors with limited analytical skills. However, considering the empirical nature of our models, which are based on a specific time period and Nordic sample, the results can vary for different markets and time periods.