Equity valuation under Bull and Bear market regimes in South East Asia firms: a switching regression approach

Abstract

A switching regression approach is used to analyse the market equity value of firms in the three South East Asia countries with a comparison to Japan. Two regimes are used to optimally sort the firms in a given country based on a switching function using profit rate (net income to book equity) as its variable. The regimes are identified as a Bear security market or a Bull security market depending on the value of the profit rate. Two financial ratios are used in the regime regressions. It was found that the optimum scaled switch point separating the Bulls from the Bears for the countries was a positive profit rate ranging between 6 and 24%. The notion that a zero or negative profit rate identifies a Bear market is not supported. In general, the results across countries and for the long-term debt ratio were quite consistent. The post-Asian financial crisis of 1997 had a depressing effect on firm market equity values, regardless of the market type and the country. The Bulls and the Bears are not cousins when it comes to their different reactions to the long-term debt ratio and their different, relative, adverse responses to the financial crisis.