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Financial markets are driven not only by capital and good projects, but also by the quality ofinvestor relations and company valuation reporting and storytelling, which reduces ambiguity and uncertainty. As we know, risk is uncertainty, and this causes a higher discount to the value of companies in the eyes of investors. In emerging markets, they generally face this problem through the lack of clarity of company strategies from data and information narrated in a simple way, which is the main cause of higher risks in emerging markets, and consequently, their valuation is lower due to the presence of a strong discount rate based on uncertainty. It is not only quantitative methods that affect this, but valuation is also influenced as a whole by other non-quantitative factors, such as the impact on cash flows and discount rates due to the sustainability of earnings being affected by weak financing and investment resulting from ambiguity.
Investor Relations Quality and Its Impact on Valuation
The problem in many companies in the market is not just in the numbers or the projects, but in the quality of investor relations. A company without good investor relations management causes major issues, including the lack of clear marketing on platforms, leaving investors and clients unaware of the company's activities and strategy. Sometimes, there are poor copies of company reports, such as budgets scanned rather than properly prepared, and no clear business plan for investors, which prevents them from understanding growth plans or risks. Additionally, the delay in announcing material information increases ambiguity and uncertainty.
All of this leads to a higher discount rate applied by investors, greater valuation dispersion, and ultimately a lower market valuation.
In short, weak investor relations create a significant gap between the company's true value and its market value.
An increase in perceived risk leads to an increase in the required return, which in turn raises the discount rate and reduces the present value of cash flows. For example, companies that suffer from uncertainty—such as companies that do not have a website or that delay the disclosure of information—are difficult to include in equity research reports prepared by institutions, and this makes it difficult for valuers and financial advisory firms to assess them accurately. As a result, the risk of projection models increases to a higher level, which leads to an increase in the discount rate and raises the required rate of return, thereby reducing the company's value.
Market Psychology and Investor Behavior
Market movements and investor behavior in valuing a company can be exaggerated, especially if the investor's psychology and appetite are open to investment and buying during economic expansion cycles. Reports presented clearly and smoothly can increase investor interest in the company, as they reduce ambiguity and increase confidence in the numbers and strategy.
Conversely, in times of fear and high risk, investors tend to evaluate clear and stable sectors, such as the petrochemicals sector in Egypt during the 2023 currency crisis, due to the clarity of the sector's strategy, the presence of a clear business plan including exports, and dollar-denominated profits, which give them greater confidence and reduce their sense of risk.
General Market Mood and Its Effect on Valuation
The general market mood has a significant impact on company valuations in IPOs or share purchase cases based on fair value reports. The Egyptian market, as an example, witnessed the Act Financial IPO in July 2024.
At the time of the offering, there had been strong market activity since March 11, 2024, following the currency float and the repricing of assets to the new USD/Egyptian pound rate. The IPO was oversubscribed 54 times, reflecting the strong appetite of investors. The less clear the report or the more it relies on illogical assumptions not agreed upon by the markets, the higher the likelihood that the market value of companies or financial assets will be determined through market psychology and the extent to which investors believe these reports, resulting in a strong gap between market values and fair values. That is why emerging markets, which focus on having analysts with expertise and professional capabilities, use strong quantitative methods with market-aware assumptions, making markets more efficient from an informational perspective and bringing market values closer to fair values.
Information Asymmetry and Its Impact on Valuation
In the context of company valuation, information asymmetry means that some investors or parties have better or clearer information than others, while the rest cannot access the same information at the same time or with the same quality. This situation directly affects valuation because investors with limited information consider there to be a high level of uncertainty and risk, and they demand a higher discount rate to compensate for this risk. Ultimately, the higher discount rate reduces the present value of cash flows, which leads to a lower valuation of the company or asset compared to its true fair value. In the Egyptian market, studies indicate a relationship between information asymmetry and the company's market value, as companies suffering from weak disclosure or variation in information show greater gaps or dispersion in valuations, which also negatively affects market value because investors demand higher discounts to compensate for information ambiguity.
Conclusion
Valuation is ultimately a purely economic weighting process, whereby investments in institutions and financial assets are assessed through arbitrage between expected returns and discount rates that reflect risk. In emerging markets, clarity and transparency facilitate the valuation process by reducing projection risk, allowing valuers to form more reliable assumptions and giving capital greater confidence in deployed investments. Accordingly, the path for emerging markets such as Egypt lies in consistency, transparency, and effective cooperation between regulatory authorities and highly professional valuation practitioners. Such an environment enhances investor confidence, mitigates market volatility concerns, and ultimately attracts long-term capital inflow.
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