The economy's income and macroeconomic variables

Among the several variables that can explain the behavior of the market value of publicly traded companies, there is the economy's income. Namely, the income of the economy, a priori, is understood to have a close relationship with the Stock Exchange indicator, considering that investments and the flow of money in general are channeled through the financial market (^{Sánchez Arévalo & de Souza, 2022}).

In addition, as they are companies focused on the public utility sector, the service provided directly affects household consumption and, consequently, the income of the economy. In this way, the question of discussion derives from the relevance that household consumption has in GDP, and in the three objects of study, household consumption represents approximately 60% of GDP, that is, it is a major engine of the economy.

At this point, an aspect to be observed is the cycles that the economy's income can present and that, depending on the movement of the series, they can present structural breaks which can be decisive in the direction and the effect that the economy's income can have on the market value of companies. For the range under study, this aspect is not observed (see Figure 2), although in the case of Brazil there is a tendency for income to fall at dollar prices.

Source: ^{World Bank (2022)}

Figure 2 GDP of the countries of Brazil, Argentina and Chile 

In the Brazilian scenario, ^{Paredes and Oliveira (2017)} found influence on market value when considering the effect of GDP, the economy's basic interest rate, inflation and exchange rate in the steel, financial, construction and electricity sectors. Thus, in the study proposed here, a positive relationship is expected between the income of a country's economy and the market value of companies, since income generation in the economy reflects the growth of productive sectors.

In the case of the exchange rate, transactions carried out with the foreign market influence the economic activities of companies, mainly in the export sector. When there is a devaluation of the local currency, exporting companies tend to obtain greater gains (^{Pires, 2019}). In a study by ^{Silva, Coronel and Vieira (2014)}, when analyzing the exchange rate and the Ibovespa index, they found a negative relationship between the exchange rate and the unidirectional index. That is, the exchange rate has an impact on the determination of the Ibovespa index. Thus, it appears that the exchange rate is a predictive potential of the index.

At this point, attention is drawn to the great loss of purchasing power of the Argentine domestic currency (see Figure 3) and, as a result, the observed trend should be treated with caution, since it should exert a great influence on the market value of companies. In the Chilean case, the exchange rate fluctuation margin was smaller when compared to the Brazilian real, for the Chilean peso the quotation between 2010 and 2019 was from 510 to 702 Chilean pesos per dollar and, in the Brazilian case, it was from 1.75 to 2019. 3.94, in short, the Brazilian real lost more purchasing power than the Chilean peso. (^{World Bank, 2022}).

Source: ^{World Bank (2022)}

Figure 3 Exchange rate in the countries of Brazil, Argentina and Chile. Domestic currency against the dollar.  

On the interest rate side, ^{Assefa, Esqueda and Mollick (2017)} found a significant negative relationship with the share price. In this study, a universe of 21 developed and 19 developing countries was analyzed, being treated with panel data with a quarterly frequency, from 1999 to 2013. The findings of this study are corroborated by the literature, since the increase in the interest rate increases the opportunity cost of investing in fixed income, which leads to an expected reduction in demand for variable income.

Furthermore, in the case of interest rates, it is understood that this is a very important variable when it comes to controlling or expanding the money supply. Depending on the type of policy adopted by each country and depending on the economic scenario, its adoption has a direct effect on the value of the company, as all companies in the financial system are financed by the basic interest rate of the economy. The decrease in the interest rate causes an increase in companies' investments, consequently, in the short and medium term, the company's value tends to be maximized (^{Paredes & Oliveira, 2017}; ^{Bernardelli & Bernardelli, 2016}).

The Figure 4 shows the behavior of the interest rate on bank deposits for the three countries that are the object of study. The accentuated trend of the series for the Argentine case can be clearly seen, this behavior being the result of the policy adopted by the Argentine Central Bank as an attempt to control inflation (considered one of the highest in the world) and stabilize the exchange market. In the Brazilian case, between 2010 and 2019, the interest rate dropped from approximately 8.87% to 5.43%, and in the case of Chile, it increased from 1.75% to 2.54%. These last two countries present a totally different reality when buying monetary policies, as well as the exchange market.

Figure 4 Interest rate on bank deposits in the countries of Brazil, Argentina and Chile 

In addition, and emphasizing the importance of macroeconomic variables as determinants in the pricing of market value of companies, ^{Bernardelli and Bernardelli (2016)}, highlight in their study that the economy's income, the interest rate and the exchange rate are the greater effect on the value of companies. Based on this, in this proposed study, it is necessary to verify whether the findings by these authors can be corroborated when we analyze different economies.

Relationship between market value and financial variables

The financial indicators play an important role in the relationship with the value of the company, as they are part of the management process of an entity. As relevant variables in this context, we consider profit, profitability, as well as the capital structure, signaling the financial slack. The latter can be understood as liquidity, and both slack and profitability are factors that make companies stand out (^{Rezende & Macedo, 2021}; ^{Picolo et al., 2018}).

In the case of the sector under study, a priori, as they are companies that provide public service and have a niche of activity, profitability must be a factor linked to the company, that is, already expected by investors, on the other hand, the question that remains is to analyze the degree of commitment of equity capital. It is worth reflecting that in many of these companies the government's participation is very large, which in some cases, depending on the decisions, exerts a positive or negative influence on the business environment and, consequently, on the attractiveness of the capital market as a source of financing for economic activities.

Still talking about profitability and profit, ^{Silva, Tavares and Azevedo (2018)}, verified the existence of a significant and positive relationship between ROE and the capital structure and with the market value for companies listed on the Brazilian Stock Exchange B3. ^{Agrawal, Mohanty and Totala (2019)}, found a strong relationship between the return on shares arising from the ROE variable with the market value of companies, this study incorporated 1700 Indian companies listed on the National Stock Exchange - NSE and Bombay Stock Exchange - BSE, being the time of study from 2001 to 2016.

Also, ^{Hahn et. Al. (2010)} found a causal relationship between the share price and the payment of dividends; it should be noted that the payment of dividends is linked to earnings. This behavior reinforces the investor's preference for dividends, which does not rule out the importance of capital gains through the appreciation of stock prices. In addition, the conclusion brought by the author corroborates the causal relationship between the disclosure of information with the pricing of stock prices and, consequently, the market valuation of companies.

Along the same lines, ^{Abrokwa and Nkansah (2015)} found that dividends per share have a predictive effect on stock returns, although other variables such as earnings per share, company size and book value per share were incorporated in the study. Another study, such as the one by ^{Forti, Peixoto and Alves (2015)}, found a significant positive relationship between the variables return, company size and profit growth, with the distribution of dividends with the market value of companies. These authors reinforce that, regardless of the dividend distribution policy, earnings growth is linked to greater earnings distribution, consequently, dividend distribution announcements help to positively price the value of companies.

Finally, market value is also influenced by factors that measure the level of profitability, risk and opportunity for growth, which are directly related to the level of indebtedness, the latter of which determines the financial slack of companies (^{Pamplona, da Silva & Nakamura, 2021}; ^{Rodrigues dos Santos, & Dos Santos, 2020}). In addition, specific factors of the sector in which companies operate cannot be neglected, such as the importance of the sector and the sensitivity that it can present in the face of economic cycles.

The panel data model

The panel method is an alternative methodology when the data used are the result of a combination of time series with a cross section. The advantage of using the methodology on screen, in addition to the efficiency with the information, is to obtain a greater number of degrees of freedom, which allows improving the degree of fit of the model and the statistical significance of the parameters. Therefore, the effects not observed in a cross-section or in a time series can be detected using a panel (^{Gujarati & Porter, 2011}; ^{Greene, 2011}).

^{Fávero et al. (2009)}, highlights that the Pooled Effect is the simplest in relation to the Fixed and Random Effect methods, as it does not consider the specific effects of each company. The Fixed Effect, on the other hand, considers the specific aspects of each company, that is, individual heterogeneity, but does not vary over the period, generating high variances, which correspond to the low variability of explanatory factors, i.e., period (^{Grenne, 2011}). The Random Effect model considers the variations for each period of time analyzed and for each company, also called the error correction model, as different from the other two methods, it disaggregates the components into individual variations and variations in the period (^{Gujarati & Porter 2011}; ^{Fávero et al., 2009}).

To contrast the Pooled method, fixed and random effect, the following tests are used: the Hausman, Chow and LM Breush-Pagan tests. ^{Grenne (2011)}, argues that through the Hausman test, a comparison is made between the Fixed and Random models, great differences between these models, suggesting the inconsistency of the Random Effect estimators. The Chow test follows the same principle, but it compares the Pooled effect with the Fixed Effect, checking if there is consistency in the Pooled, if not, H0 Pooled is rejected. In the Breush-Pagan test, the Pooled Effect model and the Random Effect model are compared, if the variance of the intercept error term (u) is constant, it does not reject H0 Pooled, otherwise, if it is not constant, rejects H0.

Thus, if we have the following equation of the panel study model, which was proposed in the research, and based on what was discussed, considering the Pooled effect, we have the following formula:

Thus, following equation 1, the model to be measured has the following variables, as previously described:

Regarding the variable “Company's market value”, ^{Medrado et al. (2016)} highlights that it can be obtained by multiplying the company's share price by the number of company shares. It should be noted that this assessment is restricted to publicly traded companies and serves to assess how much the market is paying for a particular company. However, the investor should not confuse this value with the company's fair price or with the company's equity.

In order to verify relationships with the dependent variable "Market Value of Companies - VME" and the independent variables, as well as justify the expected sign of the coefficients in light of the estimation of equation 1, Table 1 details the hypotheses and signs expected. It is worth mentioning that, due to the fact that different countries are being analyzed, some coefficients may show signs contrary to what was expected, for which it will be necessary to verify the necessary justifications.

Source and treatment of data

Data on the value of the company, as well as the financial indicators of profitability, gross profit and financial slack were collected on the platform Economática and Thompson Reuters. The universe of data collected starts from 2010 to 2019, with quarterly series. To estimate the results, the company value collected at current price was deflated using a broad correction indicator for each country under study.

The same correction procedure (inflation adjustment) was performed for GDP, the exchange rate, the basic interest rate of the economy. The data for these variables were collected together with information published by the Central Bank of each country under study, in the case of Brazil BACEN - Central Bank, in the case of Chile BCENTRAL - Central Bank of Chile and, in the case of Argentina BCRA - the Central Bank of the Republic of Argentina. In total, data from 12 companies in Chile, 10 from Argentina and 39 from Brazil were analyzed with all the information available for the study.

Results for Brazil

The Table 2 shows the result of the estimation of equation 1 for Brazil. From the result of the Hausman test, it is concluded that the fixed effect is better than the other approaches. Through the fixed effect, we can say that there are unobserved and heterogeneous characteristics for each individual that are related to the explanatory variables. Consequently, it is assumed that the individual components are not correlated with the explanatory variables.

Regarding the sign of the coefficient linked to the GDP variable, the variation in the economy's income implies a variation in the same direction for the market value of the companies under study. Namely, the sector in question, as it is a public utility, corroborates the hypothesis that it is important for the economy and, even in crisis situations, it will hardly be affected to a great extent, implying the possibility of observing robust structural breaks.

Continuing, the negative coefficient of the TXJ variable denotes those monetary policies are relevant in pricing the market value of companies in the sector studied. At first, it can be understood that monetary policy decisions made by the Central Bank initially affect the business environment, influencing short-term decisions by investors. In this case, it appears that the intensity of the effect is three times, given a change of 1% in the interest rate, the market value of companies tends to fall by approximately 3.6%.

On the side of the TXC exchange rate, there is an effect similar to that observed in the previous coefficient. Evidently, exchange rate policies, as well as the very condition of the market that price the purchasing power of domestic currency, are determinant in the value of the company. At this point, the information that must be incorporated by decision makers is that the effect of monetary and/or exchange rate policies has similar intensities for the public utility sector in particular. When considering the Brazilian economic environment, the country suffered over the period under study, increasing increases in the exchange rate and given the loss of purchasing power of the domestic currency, what would be expected would be a fall in the value of these companies.

In the case of Gross Profit, ROE and financial slack, these three variables reflect the importance of financial information as fundamental in the investment intention, as well as in the aggregation of value by the company, which reflects in the pricing that the market makes on the value from the company. In this sense, given the positive sign of the coefficients, a priori, it is understood that the market value tends to increase in the face of positive variations in these financial indicators. At this point, it is important to emphasize the importance of financial slack and, therefore, of the formation of the capital structure of companies and to verify to what extent the debt commitment becomes relevant. For the specific sector, the financial slack reflects, among other aspects, the company's ability to deal with short-term debts making use of available and realizable, in general, the debt does not cover a higher percentage of equity in relation to the structure of companies.

Results for Argentina

In the Table 3 shows the result of the estimation of equation 1 for Argentina. As in the Brazilian case, the result of the Hausman test concludes that the fixed effect is the best to the detriment of the other approaches. In this sense, interpretation and discussion of the results will follow the order of the coefficients found through the fixed effects.

With regard to GDP, it can be seen that positive variations are followed in the same direction by the company value, although it is not statistically significant, this result brings a good reflection on the matter. In general, as it is a strategic sector, a priori it is understood that the public utility sector behaves similarly to the performance of the economy. At this point, it is worth mentioning the effect of price control policies carried out in that country, considering the economic instability given the increase in poverty levels, which weakens the market value of these companies.

In addition, another factor worth mentioning is related to the monetary policies adopted in Argentina. During the study period, it was found that interest rates in Argentina rose significantly, and this measure was adopted with the aim of controlling inflation. The high rate of inflation actually weakens the purchasing power of the domestic currency, which consequently affects the market value of the companies under study. At this point, the sign of the TXC exchange rate coefficient stands out, which does not corroborate the expected. Due to the positive sign of TXC, the company value increases as the domestic currency depreciates against the dollar.

These last two results deserve a reflection, on the one hand it is understood that the restrictive monetary policy tends to curb inflation through a lower expansion of the money supply, however in the Argentine case this reality was not the expected and the domestic currency continued to lose purchasing power. At this point, a much-commented aspect in the business environment centers on the loss of confidence among international investors related to the government's ability to meet all debt payments. Thus, given this reality, it was expected that the exchange rate coefficient would follow the behavior of monetary policy, with a negative sign.

Regarding the coefficients of the variables Gross profit, ROE and financial slack, the signs are expected and denote the importance of the fundamentals of the companies in the sense of pricing the market value of the companies. As they are companies operating in an important sector of the economy, it was expected that the profitability, profit and ability of companies to meet their short-term obligations are determining variables, although only the gross profit has a statistical and significant argument. Still related to fundamentals and specifically ROE profitability, a positive relationship was to be expected, although the coefficient is not statistically significant, important conclusions can be drawn considering that profitability plays a key role in attracting investments.

Results for Chile

For the Chilean case, the results can be seen in Table 4. Initially, it is worth mentioning that the interpretation of the results follows the estimation of fixed effects considering the result obtained by the Hausman test. Thus, it is considered that the coefficients incorporate heterogeneous information within the universe of companies studied, which makes the interpretation of the results found plausible.

On the GDP side, there is a positive relationship between income and the market value of companies, although not statistically significant. This initial result encourages a reflection on how important the performances that public utility companies have in the Chilean scenario can be to explain the behavior of the economy's income. Although it is a strategic sector for serving public services and the Chilean economy is one of the most stable for the time being studied, a positive and significant statistical relationship was expected. The balance that can be made in the light of the result found concerns the loss of market value of some companies that are the object of study, with behavior different from that of the economy, and in the period under study the Chilean GDP had one of the best performances of the region.

In relation to the TXJ coefficient, the result denotes a positive relationship, contrary to what was expected in the light of the theory. However, it is worth pointing out some aspects of the Chilean economic reality that may help to explain this finding, which is related to economic stability, as well as the intensity of the interest rate variation. It should be noted that a brief analysis of the interest rate trend in Chile indicates a stable behavior over the analyzed period. Thus, in a country with a controlled level of inflation and an almost constant interest rate, the effect on the value of companies tends to be positive and companies are encouraged to obtain financing without greater risks.

Linked to this behavior, there is a positive result of the coefficient of the TXC exchange rate, in such a way that the devaluation of the domestic currency against the dollar would imply in a greater value of the companies. A justification for this result can be explained by the social and political uncertainty that took shape in 2019, through the protests in October of that year, which devalued the purchasing power of the domestic currency. Additionally, according to the Central Bank of Chile (2019), this country has a solvent financial system, a solid fiscal situation and inflation expectations around 3%, with monetary policy adapting to these circumstances. Thus, although the domestic currency loses value, there is a whole context of information that the business environment incorporates and that implies the value of companies.

Looking at the financial information, the intensity of the Gross Profit and ROE coefficients draws attention, although the results show no statistical significance, important conclusions can be drawn from this information. In the business environment, decision makers need to incorporate information into their decisions to help them choose the best path. In the case of gross profit, this can represent a competitive advantage as a particular company incorporates a higher volume when compared to other companies in the same sector. In addition, gross profit as well as the result of profitability may indicate a competitive advantage in product costs due to efficient production techniques or economies of scale. In general, for the Chilean case, decision makers must incorporate as relevant information the information of the companies, such as fundamentals, and secondly, the main macroeconomic variables of the country.