Valuation of small and medium sized manufacturing companies in Turkey: effect of internationalization, earnings, cash flows, dividends, book value and leverage

Abstract

Small and medium enterprises (SMEs) play an important role for both national and global economies. They create employment and added value, have flexible structure, less bureaucracy, ability to take fast decisions and they are more responsive to changes. In the world, 95% of the firms hold SME characteristic; they carry 66% of the employment and 55% of the production. In Turkey SMEs constitute 76.7% of country’s employment, 26.5% of investment. They form 95% of the manufacturing sector, 61.1% of the employment and 27.3% of the added value in this sector. Despite the obvious importance of SMEs for the economy of Turkey, the existing valuation literature fails to narrow its focus to this specific area. Thus, with the aim of contributing the valuation efforts of small and medium manufacturing companies in Turkey, following the steps of Ohlson (1995) we developed three linear models in order to reveal the effect of internationalization, earnings, cash flows, dividends, book value and leverage on the value of the small and medium manufacturing companies in Istanbul Stock Exchange. This study contributes the international trade literature by first realizing a broad analysis of the effects of certain variables on the market value of the Turkish small and medium manufacturing companies, which may be useful for the foreign investors, foreign companies that seek acquisitions or mergers as well as SME owners and managers in Turkey who look for a more effective value management for their companies. Secondly it seeks the effect of internationalization, which shows the international activity of the company, on the value of the small and medium manufacturing companies in Turkey. The results show that our earnings based linear model explains 51.2% of the variance of small and medium sized manufacturing companies’ (in ISE) firm value. Moreover while leverage and degree of internationalization have no significant effect on the dependent variable, dividends and book value have significant and positive effect. As for the earnings pooled regressions show that it has a significant but negative relation.