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Do Valuation Multiples Reflect a Size Effect?

Author

Listed:
  • Cornell Bradford

    (California Institute of Technology, Pasadena, CA91125, USA)

  • Gokhale Rajiv

    (Compass Lexecon, Chicago, IL60604, USA)

Abstract

In this paper, we empirically examine whether there is evidence to support the hypothesis that a size premium is impounded in valuation multiples. Overall, we find essentially no evidence to support the hypothesis. One interpretation of this finding is that there is no size effect in current U.S. data. If that is true, then size premiums should not be added to the discount rate and there is no potential inconsistency with the market multiples approach. However, if an appraiser chooses to add a size premium to the discount rate based on historical return data such as that reported by Ibbotson, it raises the possibility the DCF value indicator will be inconsistent with the value indicator based on market multiples. Given the fact that virtually all corporate appraisals include both a DCF and a market multiples analysis our work suggests that the two approaches should be blended with care in situations where a size premium is contemplated.

Suggested Citation

  • Cornell Bradford & Gokhale Rajiv, 2018. "Do Valuation Multiples Reflect a Size Effect?," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 13(1), pages 1-26, February.
    • Handle: RePEc:bpj:jbvela:v:13:y:2018:i:1:p:26:n:1
    DOI: 10.1515/jbvela-2015-0013
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