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A note on the valuation of asset management firms

Author

Listed:
  • Juha Joenväärä

    (University of Oulu
    Imperial College London)

  • Bernd Scherer

    (Deutsche Asset Management
    EDHEC Risk
    WU Wien)

Abstract

Market capitalization relative to assets under management is often used to value asset management firms. Huberman’s (2004) dividend discount model implies that cross-sectional variations in this metric are explained by cross-sectional differences in operating margins, and yet we find no evidence of this in our data set. We show that a superior model—inspired by the work of Berk and Green (2004)—includes also the level of fees as an explanatory variable. This approach dramatically increases the fit of our valuation model and casts doubt on the relevance of the so-called Huberman puzzle.

Suggested Citation

  • Juha Joenväärä & Bernd Scherer, 2017. "A note on the valuation of asset management firms," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 181-199, May.
    • Handle: RePEc:kap:fmktpm:v:31:y:2017:i:2:d:10.1007_s11408-017-0287-y
    DOI: 10.1007/s11408-017-0287-y
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    References listed on IDEAS

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    1. William N. Goetzmann & Jonathan E. Ingersoll & Stephen A. Ross, 2003. "High‐Water Marks and Hedge Fund Management Contracts," Journal of Finance, American Finance Association, vol. 58(4), pages 1685-1718, August.
    2. Bernd Scherer, 2010. "Should Asset Managers Hedge Their “Fees at Risk”?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(4), pages 96-102, September.
    3. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45.
    4. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    5. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
    6. Thomas Dangl & Youchang Wu & Josef Zechner, 2008. "Market Discipline and Internal Governance in the Mutual Fund Industry," The Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2307-2343, September.
    7. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    8. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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    More about this item

    Keywords

    Asset management firm; Valuation; Revenues; Operating margins;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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