‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

The relationship between the intrinsic value of the

stock and the institutional investor behavior applied
on the listed firms in Kuwait stock market
** 
‫جراح جمال علي صبحان‬ ‫بهاء الدين سعد إبراهيم‬
Abstract
This thesis is conducted to examine the relationship between
the intrinsic value of the stock and the institutional investor
behavior applied on a sample of 159 companies which
represent the listed firms in Kuwait stock exchange market.
The judgmental sample to 6 listed firms so we can apply the
DCF model and the present value coefficient to acquire the
growth rate to get (the intrinsic value of the stocks) the
independent variable. It was relied on the survey list to
collect primary data for the dependent variable (institutional
investors behavior) a questionnaire consists of 13 questions
presented to 31 portfolio managers, assistant managers and
investment senior analyst in several institutional investments
to analysis their behaviors.
The study found a statistically significant relationship
between intrinsic value of the stock and the institutional
investors behavior. Furthermore, the study shown a
significant positive correlation between the intrinsic value of
the 6 company stocks that generated by the DCF model
compared with the average market price for each year by the
Correlation coefficient for 9 years.
Keywords: Intrinsic value, Institutional investors behavior,
Market value, Discounted cash flow, Prospect theory, Regret
theory

‫ جامعة حلوان‬،‫ األستاذ المساعد بكلية التجارة وإدارة االعمال‬

‫ جامعة حلوان‬،‫ كلية التجارة وإدارة االعمال‬،‫** باحث ماجستير بالدراسات العليا‬

2023 – ‫ – العدد الرابع‬37 ‫المجلد‬ ‫المجلة العلمية للبحوث والدراسات التجارية‬

1499
 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

‫"العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة‬

‫على الشركات المدرجة في سوق األوراق المالية الكويتي"‬

‫ملخص‬
‫يهدف البحث الى قياس العالقة ما بين القيمة الجوهرية للسهم وسلوك المستثمر‬
‫المؤسسي المطبقة على ‪ 159‬شركة مدرجة في سوق االوراق المالية الكويتي‪.‬‬
‫العينة التي يمكن التطبيق عليها نموذج التدفقات النقدية المخصومة وهي ‪6‬‬
‫شركات إليجاد القيمة الجوهرية للسهم المتغير التابع‪ .‬وتم تقديم ‪ 31‬استبيان‬
‫ملخص ب ‪ 13‬سؤال لمدراء محافظ ومساعدين مدراء ومحللين استثمارين‬
‫اولين لقياس سلوك المستثمر المؤسسي لعدة شركات استثمارية‪.‬‬

‫توصلت الدراسة الى وجود عالقة ذات داللة إحصائية بين سلوك المستثمر‬
‫المؤسسي والقيمة العادلة للسهم‪ .‬كما أظهرت النتائج وجود معامل ارتباط إيجابي‬
‫ما بين القيمة الجوهرية للسهم لستة شركات من خالل نموذج التدفقات النقدية‬
‫المخصومة ومعدل أسعار السوق لألسهم من كل سنة خالل ‪ 9‬سنوات‬

‫الكلمات المفتاحية‪ :‬القيمة الجوهرية للسهم‪ ،‬سلوك المستثمر المؤسسي‪ ،‬قيمة‬

‫السوق‪ ،‬التدفقات النقدية المخصومة‪ ،‬نظرية التوقع‪ ،‬نظرية التندم‬

‫المجلد ‪ – 37‬العدد الرابع – ‪2023‬‬ ‫المجلة العلمية للبحوث والدراسات التجارية‬

‫‪1500‬‬
‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

I) Introduction

Every asset, financial as well as real, has a value. The key to

successfully investing in and managing these assets lies in
understanding not only what the value is, but the sources of the
value. Every asset can be valued, but some assets are easier to
value than others, and the detailed of valuation will vary from
case to case. thus, valuating of a real estate property will require
different information and follow different format than valuating
a publicly traded stock.

There are different techniques or models that are used to value a

share prior to making an investment decision. A good share
valuation model should be simple, understandable, testable and
precise in explaining current prices against historical data and
be helpful to investors in isolating the market consensus
estimate of future company performance (Wilcox, 1984)1.

In this research, the valuation approach would be referred as the

discount cash flow models. The intrinsic value of a share is
used for many reasons and one of them is for evaluating prices
that could be used for mergers and acquisitions, changing
capital structure, expanding decisions and dividend policies.
According to Heifer and Vishny (2003), Rhodes-Kopf,
Robinson, and Viswanathan (2005)2 and Gao (2010)3,

1
Wilcox J.W. (1984). The P/-ROE Valuation Model. Financial Analysts
Journal, Vol 40(1), Jan –Feb 1984, pp.58-66.
2
Morris R., Rudd D. P. and Flanegin FR. (2005). Should Investments
Professors Join the “Crowd”? Managerial Finance, Vol 31(5), 2005, pp.
28-37.

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

misevaluation is used as a significant driving force in mergers

and acquisitions where they stimulate managers to undertake
acquisitions. It is the investment horizon of managers that will
dictate the need for valuation and the result of the valuation.
Managers who have a longer horizon tend to focus on the firm’s
long-term value and they use overvaluation to acquire target
firms in order to preserve some temporary over valuation for
long run shareholders (Gao, 2010).

II)Literature reviews and Theoretical framework

II.I) Previous studies
Rafael La Porta Florencio Lopez‐De‐Silanes Andrei Shleifer
Robert Vishny (2002).
“Investor Protection and Corporate Valuation”
● The objective of the research
The objective is to present a model of the effects of legal
protection of minority shareholders and of cash‐flow
ownership by a controlling shareholder on the valuation of
firms. We then test this model using a sample of 539 large
firms from 27 wealthy economies
● Conclusion
The research has presented a simple theory of the
consequences of corporate ownership for corporate
valuation in different legal regimes. We have also tested this
theory using data on companies from 27 wealthy countries
around the world. The results generally confirm the crucial
predictions of the theory, namely that poor shareholder
protection is penalized with lower valuations, and that

3
Gao H. (2010). Market Misevaluation, Managerial Horizon, and
Acquisitions. Financial Management, Vol 39(2). Summer 2010. Pp.833-
850.

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

higher cash‐flow ownership by the controlling shareholder

improves valuation, especially in countries with poor
investor protection.

Abdul Nafea Al Zararee and Abdulrahman Al-Azzawi.

(2014).
“The Impact of Free Cash Flow on Market Value of Firm”
● The objective of the research
The objective is to investigate the relationship between cash
flow to equity and the firm’s market value in the
pharmaceutical sector of Jorden
● Conclusion
The research has confirmed a positive relationship between
FCFE and market value of the firm.

Abdul Nafea Al Zararee and Abdulrahman Al-Azzawi.

(2014).
“The Impact of Free Cash Flow on Market Value of Firm”
● The objective of the research
The objective is to investigate the relationship between cash
flow to equity and the firm’s market value in the
pharmaceutical sector of Jorden
● Conclusion
The research has confirmed a positive relationship between
FCFE and market value of the firm.

Kung-Cheng, Ho (2016).
“A Comparative Analysis of Accounting-Based Valuation
Models”
● The objective of the research
The objective of the research is to answer two questions:

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

(1) Compare the reliability of the dividend (DIV) model, the

residual income valuation (CT, GLS) model, and the abnormal
earnings growth (OJ) model.
(2) Find the model that more reliable than those from the other
three models
● Conclusion
The article examined the relative valuation accuracy between
stock price and theoretical value for OJ, DIV, CT, and GLS
models, using analysts-based and model-based earnings
forecasts to generate valuation estimates. Among our four
models, the OJ model provides superior reliable valuation
estimates versus the other three. the OJ valuation estimates’
average probability is greater than that of the other models. it
suggested that capitalized next-year earnings forecast is a
superior anchor versus book value. By comparison, the book
value in RIV fails to adequately track movement in stock
prices. Abnormal book value growth appears to more than
compensate for the inadequacy in book value.

Bader S. Alhashel. (2018).

“Rights offering announcements and the efficiency of the
Kuwaiti market”
● The objective of the research
The objective of the research is:
1) Test the semi-strong form of the EMH in the Kuwait Stock
Exchange.
2) Examining the behavior of stock prices around the date of
rights offering announcements based on a sample of 69 rights
offerings over the period 2004–2013.
● Conclusion

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

Those prices incorporate new information within an average of

4 days. The observation has been taken as evidence that the
Kuwaiti market is a semi-strong efficient market.

II.II) Gap in the Literature

There has been research on valuation models and to determine
whether the intrinsic value affect the market value. However,
there is no research that has been done to measure the role of
the intrinsic value on the institutional behavior applied on
Kuwait Stock Market listed firms to determine the relationship
between intrinsic value obtained by discounted cash flow
models and the institutional investors behavior.

II.III) Theoretical framework

1.1)Understanding Institutional Investor

To begin with, an institutional investor is an organization or

corporation that invest in the interest of others. There are many
types of institutional investor for example pensions, banks,
insurance companies, and mutual funds. Institutional investors
are considered as the whales on wall street because they
purchase and sell significant squares of stocks, bonds, or other
securities.
Likewise, an institutional investor is a legal entity that pools the
funds of several interested investors, private individuals, or
other legal entities, to invest in a variety of financial
instruments and profit from the process. To put it another way,
an institutional investor is a company that invests on behalf of
its shareholders. The aim of the investor is to make sure that
they get assets to invest on and then in return they make money
for the clients but in the whole process they also end up making
good amounts of money. On behalf of clients, customers,

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

members, or shareholders, an institutional investor buys, sells,

and manages stocks, bonds, and other investment securities
(Davies et al., 2004). The institutions have the resources they
need to carry out research and know what is good to invest in as
well as know when to buy and when to sell and because of this,
they largely control and have a significant influence on price
fluctuations in the markets.

1.2) The difference between institutional investors and

individual investors:
There exists a very big difference between the institutional
investors and individual investor and the main difference comes
largely in investment as the individual investor mainly invests
in his own personal money driven by his own personal goals
and ambitions, on the other hand, institutional investors do not
use their own money but instead invests on other people’s
money on their behalf. Other differences include access to
resources where the individual investors are only exposed to
limited resources to conduct research as well as purchasing
products whereas the institutional investors boast a significantly
huge number of resources at their disposal. Duong et al (2009)
assert that, Institutional investors are huge corporations that
may take benefit of a variety of resources, such as financial
professionals, to monitor their portfolio daily which is not the
case for individual investors who must conduct their own
research and analysis using publicly available data.

1.3) Characteristics of Institutional Investors

• Institutional investors are legal entities

• They are also managed professionally

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

• The institutional investors have a huge role in the stock

market and they own a significantly large amount of
shares in that sector. Institutional investors buy and sell
enormous blocks of stock and have a significant impact
on the stock market's movements (Davies et al., 2004).

1.4) Investment behavior of institutional investors

According to Bebchuk et al (2017), Investment behaviors are
defined as how investors assess, predict, analyze, and review
decision-making procedures, which includes investment
psychology, data gathering, defining and comprehending,
research, and analysis. The investment behavior of most
Institutional investors is determined by the risks involved and
the returns. Most investors will opt for the investment that
balances the risks and returns since high return is always
associated with high risks (Bebchuk et al., 2017). The
relationship between returns and risks is the most important
factor to consider when choosing investment behaviors,
markets, or strategies, which is to choose investment targets
with high credibility, huge firm size, high dividends, and high
returns. The investment behaviors are also influenced by the
experiences as well as the psychological factors of those
involved in the decision-making process. According to
Nofsinger (2017), Investor psychology and expectations,
according to the study, are also important variables in investing
performance.

The investors have mastered the use of psychological analysis

of the market such they know precisely how psychology affects
buying and selling stock market. Most investors overlook
objective data and are swayed by media reports; they purchase
stocks when they are cheap and sell them when they are
expensive (Nofsinger., 2017). People will also invest in credible

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

companies with credible records, large and stock size since they
feel that the return on investment. Investors would choose to
invest in companies with a high level of credibility, a greater
size, high cash/stock dividends, and a high stock price (3H
stocks) or high risk with high reward (Bebchuk et al.,2017).
Other factors that play a role as well in the investment behavior
of institutional investors are the macroeconomic factors as there
are risks and non-risks involved with the fluctuations in prices.
Fabozzi and his co-authors talk about a lot if things in the
financial world, but not about the underlying human behavior,
behavior finance or behavioral economics more broadly, is a
kind of revolution that has occurred in finance and economics
over the last 3 decades and it remains somewhat controversial
and its coming along that behavioral finance as an important
element of finance. Economists have liked to invoke the
principle of rationality as an underlying component of their
theory such as the investor should be mature and rational, and
that has been useful but it’s of limited use, because people are
not rational; they are often rational, not completely rational.
The real problem is that people are complex, and the financial
institutions are designed for real people and their functioning
depends on the behavior of real people.

2) The main rules of the Behavioral Finance:

Prospect theory
Behavioral finance has many aspects, one of these aspects
which in the present considered one of the most famous
element of behavioral finance is prospect theory, an analysis of
decision under risk, uncertainty and how people form decisions

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

about prospects (Kahneman & Tversky,1979) 4. According to

this theory there are two functions which represents how people
value things and the way they deal with probabilities: value
function and weighting function.

figure: value function5

this function shows the way people value financial gains or

losses, (Kahneman and Tversky, 1979) wrote in their
econometrical that people don’t weigh gains and losses linearly,
the figure shows there is diminishing marginal utility for gains,
in the other hand, for losses we have concave up, the zero here
is the reference point which refers to today’s wealth. These
social scientists proposed that losses have a greater emotional
impact than a gain of the same amount. Furthermore, the
investors weight potential gains more than losses, despite the
losses people may accept the investment whenever the gains are
presented to them.

The other aspect is the weighting function which present how

people psychologically think about probabilities (Kahneman
and Tversky,1990). A probability is a number between 0 and 1
4
Kahneman, D., & Tversky, A. (1990). Prospect theory: An analysis of
decision under risk. In P. K. Moser (Ed.), Rationality in action:
Contemporary approaches (pp. 140–170). Cambridge University Press.
(Reprinted from "Econometrica" 47 (1979), 263-91
5
Ibid., (pp. 279).

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

or 0 and 100%, the errors that people make are described by the
weighting function, it’s the psychological impact that people
are having as if they just don’t understand the probability, and
these are errors that naturally happen.

figure: weighting function6

(Kahneman and Tversky,1990) claimed that for very low

probabilities people may around them to zero and for very high
probabilities, they may around them to one but if they decide
not to around them to zero neither one, they exaggerate the
difference between 0 and 1 as it’s like there is only three
probabilities; cannot happen which refers to 0, maybe (that
refers to exaggerate people) and will happen which refers to 1.

Regret theory
These aspects explain many things go on in finance
nevertheless, not everything. Behavioral finance considered a
huge field, not yet being exposed, Regret theory an alternative
theory of rational choice under uncertainly by (Loomes and

6
Kahneman, D., & Tversky, A. (1990). Prospect theory: An analysis of
decision under risk. In P. K. Moser (Ed.), Rationality in action: Contemporary
approaches (pp. 280- 284).

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

Sugden, 1982) 7, refers that People fear the pain of regret

resulting to people show some tendencies for errors and bad
decisions, so then people end up designing their life and their
decisions around that to avoid doing anything that they might
regret later, which it can create problems and bad decisions
because of overly worried about regret.

Overconfidence
In addition, Psychologists have found that there is a human
tendency to overestimate one’s own abilities, most of the
people think they are above average, and some of them think
they are way above average and this tendency has been revealed
in a number of experiments. Knowing where the market is
going is one of the important knowledge in corporate finance
field and most of the analysis thought they are above average in
their analytical skills, and apparently, it is impossible
statistically that most of these analysis are above average,
(Montier, 2006) 8 conducted in his study of 300 professional
fund managers surveyed that 74% believed that they were
above average at investing and delivering job performance,
while most of the 26% of the 300 remaining considered them-
self as average. This means that all these mangers found
themselves average or better which it is not possible, since the
statistics method states that 50% of any sample can be either
above or below average.

The psychologists have tried to describe what is goes on in

people’s mind that produces answers and decisions like this,
one of them is that people seem to have a sense that they
understand the world more than they really do and that is
7
Loomes, G., & Sugden, R. (1982). Regret Theory: An Alternative Theory of
Rational Choice Under Uncertainty. The Economic Journal, 92(368), 805–824
8
James Montier. (2006). Behaving Badly. SSRN Electronic Journal, 10.2139,
pp(3-16)

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

illusion, actually the world is just infinitely complicated and

there are so many surprises, which This also applies to the
market, investors and the investment world.

2.1) intrinsic value

Assets are valued based on their intrinsic value. Rather of

utilizing the current market price of the asset, an objective
computation or complicated financial model is used to arrive at
this figure. This phrase is used in financial analysis to describe
the process of establishing a company's intrinsic value and cash
flow as precisely as possible. The difference between the
option's strike price and the underlying asset's current price is
referred to as the "difference in option pricing. "The phrase
"intrinsic value" may be used to a variety of contexts.
Typically, the term refers to the job of a financial analyst who
evaluates an asset's intrinsic value using basic and technical
analysis. Financial analysts use a variety of quantitative,
qualitative, and perceptual factors to determine a company's
value, but there is no universal standard for determining a
company's intrinsic value.

The intrinsic value of the business is simply the fair value of the
business, it’s what the business is. American economist (John
Burr Williams,1938) stated in his book the theory of investment
value that usually been quoted by warren buffet in his lectures
is that the intrinsic value of any stock, bond or business today is
determined by cash outflows and inflows, discounted at an
appropriate interest rate, that be able to be expected to occur
during the remaining life of the asset9.

9
Williams, J.B. (1938), The Theory of Investment Value. Harvard University Press,
Cambridge, MA, pp.55-73

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

2.2) Discontinued cash flow model (DCF) and intrinsic

value:

When estimating a company's intrinsic value, the discounted

cash flow (DCF) model is often used. In the DCF model, free
cash flow and the weighted average cost of capital are
employed (WACC). Therefore, WACC considers the time
value of money and returns 'risk for all future cash flow to the
present.

The weighted average cost of capital refers to investment

returns that are larger than the company's cost of capital. If a
company needs to raise capital, it may do so by issuing bonds
or stock shares. As a result of a project or investment in a firm,
the DCF model predicts potential income streams that might be
realized later, if a company's rate of return and its intrinsic
worth exceed its cost of capital, it is optimal.

This means the risk-free rate of return that might have been
generated had the project or investment not been pursued is
considered. In other words, the risk-free rate of return must be
higher than the return on the investment. Unless there is a
guarantee that the project will succeed, there is no use in doing
it10.

2.3) Stock valuation according to the free cash flow model

the value of the company's value and the value of the

shareholder, depends on the interaction of two components, the
first is cash flow and the second is the cost of capital.
1. Cash flow

10
SWANSON, E. T. 2022. The Federal Funds Market, Pre-and Post-2008.

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

Relying on the direct concept of cash flow (net profit after tax
+ depreciation), can be misleading, because it does not reflect
the current cash flows that is necessary to survive in the
future11. Hence, three cash flow concepts appeared, operating
cash flow, free cash flow and proprietary free cash flow.

1.1. Operating cash flow

It can be estimated through the following equation:

Operating cash flow = [cash revenues - cash operating costs

- taxes] =
[cash revenues - cash operating costs] [1 - tax rate] +
[depreciation x tax rate] =
[cash revenues - operating costs] [1 - tax rate] +
[Depreciation] =
[Operating Profit After Tax] + [Depreciation]

Operating profit after tax means profit before interest deduction

and after-tax deduction, while cash operating profit after tax
refers to accounting profit before deduction of depreciation and
interest. As for operating profit in general, it is profit before
interest and taxes are deducted.

The concept of operating cash flow is an essential concept to

serve decisions that take into account the dimension of time,
and then we find it common in the analysis of long-term
investment decisions and decisions related to determining the
optimal level of investment in receivables and inventory and
attempting to determine the value of the facility.
11
Fabozzi, Frank J., and Peterson, Pamela P., Financial Management &
Analysis, Second Edition, Wiley, 2003, p.805.

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

1.2. Free cash flow

The value of this flow is estimated, according to the following
equation:12
Free cash flow = [operating cash flow after tax] - [net
investment in fixed assets] - [net investment in current
assets]
= [Net investment in fixed assets = Change in Fixed Assets +
Depreciation]
&
[Net investment in current assets = Change in Current
Assets – Change in Accounts Payable and Receivable]

It is noted that the operating cash flow measures the cash

generated from operations, without considering the investment
spending requirements or working capital requirements, and
this flow must be positive, because its negative value and
repeated for several periods of time, indicates the inability of
the facility to generate cash that Sufficient to cover operational
costs.

As for the total cash flow, it considers what is spent on

investments in fixed assets and additions to working capital,
and this flow is often negative. When the facility grows at a
rapid rate, we often find that spending on inventory and fixed
assets is higher than the cash flow resulting from the sales. Free
cash flow is an important concept in long-term financial
planning, as well as when evaluating facilities for acquisition
purposes or for the purposes of judging the extent to which
management decisions contribute to value creation.

12Gitman, Lawrence, Principles of Managerial Finance, Twelfth Edition,

Pearson,2009,p.115.

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

This concept implies, that a part of the funds generated from the
activity of the enterprise, must be set aside to reinvest in the
enterprise, and therefore, these funds are not available for
distribution to the owners of the enterprise.

The company's free cash flow can also be formulated as

follows:
The company's free cash flow = operating profit after tax -
investment requirements

Thus, the free cash flow represents the amount of cash flows
available to investors (creditors and owners) after the company
fulfills all its operational needs and fulfills the investment
requirements13.

1.3. Free cash flow for ownership:

Where the term free cash flow for ownership means, the
maximum distributions that can be paid by the enterprise,
without sacrificing growth model. Therefore, the additional
investment expenditure financed by the property needs to be
deducted from the company's net cash flow. So, it will be14:

Free cash flow of the property = net profit after tax +

depreciation - investment spending financed by the
property

13
Gitman, op.cit, p.115.
14 Mandell, Lewis and O’Brien, Thomas J., Investments, Macmillan, 1992,
p.352.

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

Ownership-financed investment expenditure = net property

added + depreciation.
Equity free cash flow = Net profit after tax - Net property
added
As it noticed,
[Net Equity Added = New Retained Earnings + New Issues
of Equity - Recovered from Existing Ownership].

1. Valuation models

The value of the company can be estimated from one of two

models, the first is based on estimating the value of the
property, by deducting the free cash flow of the property, and
then adding the value of the indebtedness, to reach the value of
the company. The second model is based on directly
discounting the free cash flow stream. If we want to estimate
the value of the property, we subtract the value of the debt from
the value of the company.
To build a model for estimating the value of the company,
where we will assume once, that the company's performance is
stable, and then achieve a permanent regular growth rate. Then
we will assume the case that the company is in the stage of
growth, and therefore achieves a high rate of growth, for a
limited period, and then growth returns to regularity after that.
Finally, we refer to the estimation of the property value, under
the same assumptions.

1.1. Company value with Regular growth condition

We will symbolize,
V0 = the value of the company with the symbol.
FCF = the free cash flow with the symbol.
G = the growth rate with the symbol.

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

WACC = the cost of capital with the symbol.

Company value = present value of the free cash flow stream.
Company value: Regular growth condition: We will symbolize
the value of the company with the symbol S0&, the free cash
flow with the symbol D & H, the growth rate with the symbol
M & and the cost of capital with the symbol Rho.
Company value = present value of the free cash flow stream.

V0 = [FCF (1 + g) ÷ (1 + WACC)] + [FCF2(1 + g) 2 ÷ (1 +

WACC)2] + [FCF3 (1 + g)3 ÷ (1 +WACC)3] + [FCF4 (1 + g)
÷ (1 + WACC)] + ………∞ (1)

By multiplying both sides of the equation by the expression (1 +

g) ÷ (1 + WACC), we get:

V0 [(1 + g) ÷ (1 + WACC) = [FCF2 (1 + g)2 ÷ (1 + WACC)2]

+ [FCF3 (1 + g)3 ÷ (1 + WACC)3] + [FCF4 (1 + g)4 ÷ (1 +
WACC)4] …………∞ (2)

Subtracting equation (2) from equation (1), we get:

V0 - V0 [(1 + g) ÷ (1 + WACC)] = [FCF1 (1 + g) ÷ (1 +

WACC)]

Multiplying both sides of the equation by the expression (1+

WACC), we get:
V0(1 + WACC) - V0 [(1 + g) = FCF1 (1 + g)

Taking V as a common factor, on the left-hand side of the

equation:

V0(1 + WACC - 1-g) = FCF1 (1 + g)

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

V0 = FCF1 (1 + g) ÷ (WACC - g)

That is,
the value of the company = expected free cash flow ÷ (cost
of capital - growth rate)

1.2. Company value with the case of erratic growth15

Company value = [present value of the free cash flow stream

during the period of abnormal growth] + [present value of the
value of the company at the end of the period of abnormal
growth].
That is, the model of regular growth is applied to the period
following the period of abnormal growth, then discounted to the
current moment of evaluation, with the addition of the present
value of free cash flows during the period of abnormal growth.

V0 = [t = n, g t=1 FCF÷ (1 + WACC) t] + [FCF t (1 + g) ÷

(WACC – g)] ÷ [1 + WACC] n

1.3. Equity value case of regular growth

The following model can be applied:
VEQUITY = n, g T=1 [FCFEQUITY \ (1 + WACC)t]
Where V represents the value of the property, and FCF
represents the free cash flow of the property in period T, and
WACC represents the required rate of return on property funds.
Hence, the value of ownership in the facility is the sum of the
present values of the free cash flows of ownership, discounted
at the rate of return required by the shareholders, and by
dividing this value representing the ownership, by the number
of shares, you get the fair value of the share.

15
Copeland, Thomas E., Weston, J. Fred and Shastri, Kuldeep, Financial
Theory and Corporate Policy, Fourth Edition, Pearson. 2005, p.500.

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

This model can also be formulated in the following form:

V0 = FCF1 \ (WACC - g)
Where FCF1 is the expected cash flow of the property, a year
from now, that is, which is equal to the free cash flow of the
property multiplied by the total growth rate, that is:
FCF1 = FCF (1 + g)

The growth rate, equal to the rate of return on equity, multiplied

by the ratio of property added to net profit after tax, and it
reflects the growth rate of free cash flows of ownership, which
considers, besides retained earnings, other changes in net
property added. This contrasts with the growth rate of
dividends, in the predominantly used Gordon (discounted
dividend) model, which depends on retained earnings, which is
something that must be corrected, according to this revised
vision.

It must be emphasized that, when estimating the value of the

company, the present value reflects the value of all claims on
the company. Therefore, the cash flows used are all the flows
generated from assets, before any debt payments, but after
subtracting the reinvestment requirements needed to achieve
asset growth.

The discount rate used reflects the cost of managing both the
equity and the indebtedness funds, according to their relative
weights. But when addressing the estimation of the property
value, the present value here, only reflects the property claims
on the company. Therefore, the cash flow used is the cash
generated from the assets after debt repayments, and after the
reinvestment requirements necessary for future growth. Also,

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

the discount rate used, only reflects the cost of procuring the
property's money16.

III) PROBLEM OF THE STUDY

Understanding the mechanism of corporate evaluation is

necessary in the enterprise finance field. In addition to its major
role in the mergers and acquisitions processes, its required for
the corporation valuation.
IV)Objective of the study
The main objective we seek from this study is to try to add
value through access to research that contributes to enriching
the knowledge of each researcher in the field of financial
investment and capital budgeting in addition to other goals
related to the results reached, such as:
● To establish whether the discounted cash flow models
give an intrinsic value that is equal to, less or more than
the observed share prices for Kuwait listed companies.
● to establish whether the intrinsic value resulted by
discounted cash flow valuation models of listed firms in
Kuwait stock market influence the market value.
● to establish whether there is a relationship between
intrinsic value resulted by discounted cash flow models
of listed firms in Kuwait stock market and the
institutional investors behavior

16
Damodaran, op. cit. p.128.

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

V)The Study Method:

This study is mainly used the analytical descriptive method,

where the intrinsic value of share is determined using the
discounted cash flow valuation models applied on the listed
firms in Kuwait stock market influence the market value,
analyze the relationship between intrinsic value resulted by
discounted cash flow models of listed firms in Kuwait stock
market and the institutional investors behavior.

VI)Research Structure

The independent The dependent

variable variable

Intrinsic value
resulted by institutional investors
Discounted Cash behavior.
flow models

VII)The research population:

In this research, we use the share price and accounting data
obtained from the Bursa Kuwait databases. All companies listed
on the Kuwait stock markets that have dividend data for the full
period between 2011 and 2020 will be included in the study.

VIII)Hypothesis

To answer research questions and to achieve its objectives. It is

possible to determine the hypothesis in the following
assumptions:
The hypothesis of study:

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

H0: there is a relationship between intrinsic value of a share

and institutional investors behavior.
H1: there is no relationship between intrinsic value of a
share and institutional investors behavior.

IX)The Research Sample And Limitation:

In This research, there was some limitation that appears. First,

to apply the DCF model the free cash flows to equity must be
positive and ascending in a specific period, in this research that
applied to the 159 listed firms in Kuwait Stock Exchange, 21 of
these firms had a positive and ascending FCF from the end of
2013 until the end of 2021. The pandemic that attacked the
world in the late of 2019 and the war in the early of 2022
between Ukraine and Russia had a negative effect on the
operating cash flows and the capital expenditure of the firms
and resulted to nearly 13% of the listed firms in Kuwait Stock
Marker that had a positive FCF.
Moreover, the Discounted Rate of Return It is made up of
factors including growth rate the growth rate can be calculated
in several ways such as the average of the growth rate last
years, but it ignores the effect of time, but the scientific method
is According to the present value coefficient (PVIF), and
because of these limitations:
the study sample that can be applied on it these methods are 6
firms.

X)Mode of Analysis

In this research the main question is what is relation between

the Cash flow discounting-based methods and the institutional
investors behavior to measure this relation DCF model applied
to 6 companies that listed in the KSE to find the intrinsic value

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

of the stock and Compare it with the market price. Furthermore,

the discounted rate of this model can be either of the WACC or
the Required Rate of Return but since, this method objective is
to get the intrinsic value of the stock the RRR was chosen to get
the accurate discounted rate, the risk-free rate return is 2.00%
given from the Kuwait central bank official cite17, and the stock
market return was reported at 16.08% by World Bank collection
of development indicators18.

In addition, the growth factor can be calculated in several ways

such as, the average growth rate of a specific period of time and
the less growth rate from the same period but these ways of
calculating the growth rate ignore the effect of time the value of
money now is not equal to the same amount after a year

the accurate growth rate used in this research and considered as

the scientific method is according to the present value
coefficient (PVIF) Present value Interest Factors for One Dollar
Discounted, by dividing the old FCF to the last year FCF to get
the factor of period of time (N) and get the growth rate from the
PVIF formula Discounted at k Percent for n Periods:
PVIFk,n= 1/(1+k)n

X.I) Statistical Analysis

The quantitative research approach is employed to find out the
findings of the research study since numerical and secondary
data is used quantitative approach is considered to be a suitable

17
https://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-
releases
18
https://tradingeconomics.com/kuwait/stock-market-return-percent-year-on-year-wb-
data.html#:~:text=Stock%20market%20return%20(%25%2C%20year%2Don%2Dyear)
%20in,compiled%20from%20officially%20recognized%20sources.

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

approach for the study, according to (Leavy,2003)19 statistical

analysis are used to describe an account for the observed
variability in the data, this involves the process if analyzing the
that has been collected, thus the purpose of statistics is to
summarize and answer questions that were obtained in the
research.
Non-Parametric analysis
In this research the analysis used to fund the relation between
the variables is one sample test by the SPSS and the results:

The average rating of the six companies under study is 1.33.

A one sample t-test was conducted to compare the average
rating of institutional investment behavior and the cash flow
discounting-based methods, the result showed that there is a no
significant difference in the mean, t (30) = 1.69, p = .102. This
indicates that we do not have enough evidence to reject the null
hypothesis that there is no difference between the Cash flow
discounting-based methods and the institutional investors
behavior

19
Sharlene Nagy Hesse-Biber and Patricia Leavy, Approaches to Qualitative Research,
July 2003, 83-92p

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1525
 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

From these results, we conclude that there is a relationship

between the intrinsic value and the institutional investor
behavior and we accept the null hypothesis

X.II)Correlation coefficient
The intrinsic value of the 6 company stocks that generated by
the DCF model was compared with the average market price for
each year by the Correlation coefficient formula:

where x is, the intrinsic value resulted by DCF model and y is

the market value, the resulted test show that:
Company name significance correlation
coefficient of XY
Qurain Petrochemical Strong 0.574
Industries Significant
positive
correlation
Al Ahleia Insurance Co Weak 0.257
Significant
positive
correlation
National Petroleum Services Strong 0.769
Significant
positive

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

correlation
Agility Public Warehousing Weak 0.455
Significant
positive
correlation
ZAIN Co Weak 0.378
Significant
positive
correlation
Mabanee Co K.P.S.C Weak -0.05
significant
negative
correlation

Most of the sample shows that there is a significant positive

correlation coefficient of XY, furthermore, when the intrinsic
value of the stock for the period year compared with the market
value and its over-valued the stock price decreased, in the other
hand, when it is under-valued the stock price increased the
accuracy of this is as follow:

Mabanee Co K.P.S.C

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

Qurain Petrochemical Industries

in each table the percentage in the right shows the accuracy of

the result when the intrinsic value generated by the DCF
compared with the average market value of the begin and end
of the same period the less accuracy is 50% in agility and the
most is 100% the average of the total is 75% that means the
result of this sample shows that the investor by using the DCF
model have 75% predictability of the stock prices. In addition,

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

the chart shows the correlation coefficient of the market value

(series 1) along with the intrinsic value (series 2)

X)Testing of hypothesis
Based on the empirical analysis of the study the results are
consistent with the developed hypotheses as it is clearly found
that:
• A positive significant statistical relation between the
intrinsic value of the stock generated by the DCF model
and the institutional investors behavior
• We accept the null hypothesis

H0: there is a relationship between intrinsic value of a

share and institutional investors behavior.

XI)Conclusions
The study has examined where there a relationship between the
intrinsic value resulting by DCF model and the institutional
investor behavior of the listed firms in the Kuwait stock market.
The study found that there is no difference and there is a
significant relationship between the intrinsic value and the
institutional investor behavior, the study showed that the
intrinsic value.

XII)Recommendation
This study is limited to the sample of the institutional investor
behavior, the findings of this study could only be generalized
by 6 company from the 159 listed firms in Kuwait Stock
Exchange due to the pandemic that hit the world in the end of

2023 – ‫ – العدد الرابع‬37 ‫المجلد‬ ‫المجلة العلمية للبحوث والدراسات التجارية‬

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬

2019 many companies in the world closed and the war in the
early of 2022 many firms did not generalize a positive free cash
flows in the last 3 years, future research should include more
firms. Furthermore, the institutional investors behavior should
be compared with the amount of the trading value to know the
impact on that value and the relation.

2023 – ‫ – العدد الرابع‬37 ‫المجلد‬ ‫المجلة العلمية للبحوث والدراسات التجارية‬

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‫ جراح جمال علي صبحان‬،‫بهاء الدين سعد إبراهيم‬

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Copeland, Thomas E., Weston, J. Fred and Shastri, Kuldeep, Financial Theory
and Corporate Policy, Fourth Edition, Pearson. 2005, p.500.

Fabozzi, Frank J., and Peterson, Pamela P., Financial Management & Analysis,
Second Edition, Wiley, 2003, p.805.

Gao H. (2010). Market Misevaluation, Managerial Horizon, and

Acquisitions. Financial Management, Vol 39(2). Summer 2010. Pp.833-
850.

Gitman, Lawrence, Principles of Managerial Finance, Twelfth Edition,

Pearson,2009,p.115.
Mandell, Lewis and O’Brien, Thomas J., Investments, Macmillan, 1992, p.352.

Kahneman, D., & Tversky, A. (1990). Prospect theory: An analysis of

decision under risk. In P. K. Moser (Ed.), Rationality in action:
Contemporary approaches (pp. 140–170). Cambridge University Press.
(Reprinted from "Econometrica" 47 (1979), 263-91
Ibid., (pp. 279).

Morris R., Rudd D. P. and Flanegin FR. (2005). Should Investments

Professors Join the “Crowd”? Managerial Finance, Vol 31(5), 2005, pp.
28-37.

Sharlene Nagy Hesse-Biber and Patricia Leavy, Approaches to Qualitative

Research, July 2003, 83-92p

SWANSON, E. T. 2022. The Federal Funds Market, Pre-and Post-2008.

Wilcox J.W. (1984). The P/-ROE Valuation Model. Financial Analysts

Journal, Vol 40(1), Jan –Feb 1984, pp.58-66.

Williams, J.B. (1938), The Theory of Investment Value. Harvard University Press,
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Websites

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 ‫العالقة بين القيمة العادلة للسهم وسلوك المستثمر المؤسسي المطبقة على الشركات المدرجة‬
‫في سوق األوراق المالية الكويتي‬
https://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-releases

https://tradingeconomics.com/kuwait/stock-market-return-percent-year-on-year-wb-
data.html#:~:text=Stock%20market%20return%20(%25%2C%20year%2Don%2Dyear)
%20in,compiled%20from%20officially%20recognized%20sources.

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1532