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The Gap between the Theory and Practice of Corporate Valuation: Survey of European Experts[We are ext]

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  • Franck Bancel
  • Usha R. Mittoo

Abstract

type="main"> The valuation of companies or their assets is at the heart of most financing and investment decisions. Over the last five decades, academics have developed several simple and sophisticated models for corporate valuation. Yet valuation estimates of a firm or its assets appear to vary widely among practitioners. It is unclear whether these differences arise from practitioners' use of different valuation models or from differences in their assumptions about the inputs used in those models. To provide some insights into this issue, the authors recently surveyed 365 European finance practitioners with CFAs or equivalent professional degrees. They find that almost all survey respondents use the Discounted Cash Flow (DCF) model (along with some version of Relative Valuation that relies on the use of “comparables”). But the estimation methods of such practitioners for almost all inputs in the DCF model, including beta, the equity market risk premium, leverage, cost of debt, and terminal value, vary widely. This can be a serious problem because even small differences in inputs can cause huge variations in valuations. Such differences arise primarily because theory provides little guidance on how to estimate parameters, leaving practitioners to make their own assumptions and judgments. In sum, the authors' findings suggest that the process of estimating valuation parameters can be as important as the choice of the valuation model itself, and requires the serious attention of academics and practitioners. The authors recommend that key valuation parameter estimates be disclosed in financial and valuation reports. Their findings are also relevant to policy makers because the concept of “fair value” plays such a central role in post-crisis regulation.

Suggested Citation

  • Franck Bancel & Usha R. Mittoo, 2014. "The Gap between the Theory and Practice of Corporate Valuation: Survey of European Experts[We are ext]," Journal of Applied Corporate Finance, Morgan Stanley, vol. 26(4), pages 106-117, December.
  • Handle: RePEc:bla:jacrfn:v:26:y:2014:i:4:p:106-117
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    File URL: http://hdl.handle.net/10.1111/jacf.12095
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    Citations

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    Cited by:

    1. Karel Janda, 2019. "Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(1), pages 37-75, February.
    2. Mario Situm, 2021. "Determination of expected cost of equity with the CAPM: Theoretical extension using the law of error propagation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 77-84, January.
    3. Syed Babar Ali & Manzoor A.Khalidi, 2020. "Valuation of Equity Securities, Private Firms, and Startups," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 125-140.
    4. Olbert, Lars, 2024. "Identifying gaps between research results and education," Journal of Accounting Education, Elsevier, vol. 66(C).
    5. Welc Jacek, 2017. "EBITDA vs. Cash Flows in Bankruptcy Prediction on the Polish Capital Market," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2017(2), pages 91-103.
    6. Vidal García, Raúl & Ribal Sanchis, Javier & Blasco Ruiz, Ana, 2021. "Stock market multiples in the valuation of unlisted agrifood companies. || Múltiplos de mercado en la valoración de empresas agroalimentarias no cotizadas," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 31(1), pages 198-225, June.
    7. Vidal-Garcia Raül & Ribal Javier, 2019. "Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 14(1), pages 1-11, February.
    8. Syed Babar Ali & Manzoor A.Khalidi, 2020. "Valuation of Equity Securities, Private Firms, and Startups," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-19.
    9. Minwu Kim & Sidahmed Benabderrahmane & Talal Rahwan, 2024. "Interpretable Machine Learning Models for Predicting the Next Targets of Activist Funds," Papers 2404.16169, arXiv.org, revised Oct 2024.
    10. Bravo Sergio, 2019. "The Corporate Life Cycle and the Cost of Equity," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 14(1), pages 1-14, February.
    11. Jerald E. Pinto & Thomas R. Robinson & John D. Stowe, 2019. "Equity valuation: A survey of professional practice," Review of Financial Economics, John Wiley & Sons, vol. 37(2), pages 219-233, April.
    12. Dimiter Nenkov & Yanko Hristozov, 2023. "DCF Valuation: the Interrelation between the Dynamics of Operating Revenue and Gross Investments," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 114-138.
    13. Yuchao Fan, 2022. "Dissecting the dot-com bubble in the 1990s NASDAQ," Papers 2206.14130, arXiv.org, revised Jul 2022.
    14. Martijn J. Assem & Nico L. Sar & Philippe Versijp, 2017. "CEOs and CFOs on IPOs: The Process and Success of Going Public," De Economist, Springer, vol. 165(4), pages 381-410, December.

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