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Valuation Approaches and Metrics: A Survey of the Theory and Evidence

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  • Damodaran, Aswath

Abstract

Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.

Suggested Citation

  • Damodaran, Aswath, 2007. "Valuation Approaches and Metrics: A Survey of the Theory and Evidence," Foundations and Trends(R) in Finance, now publishers, vol. 1(8), pages 693-784, April.
  • Handle: RePEc:now:fntfin:0500000013
    DOI: 10.1561/0500000013
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    Cited by:

    1. Giulio Bottazzi & Francesco Cordoni & Giulia Livieri & Stefano Marmi, 2023. "Uncertainty in firm valuation and a cross-sectional misvaluation measure," Annals of Finance, Springer, vol. 19(1), pages 63-93, March.
    2. William R. Cline, 2015. "Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks," Working Paper Series WP15-8, Peterson Institute for International Economics.
    3. N. A. Goncharova* & I. S. Kondratenko & E. N. Zamaraeva, 2018. "Economic Mechanism of Industrial Enterprise Resources Management Efficiency Assessment," The Journal of Social Sciences Research, Academic Research Publishing Group, vol. 4(12), pages 470-477, 12-2018.
    4. Ivanovski Zoran & Narasanov Zoran & Ivanovska Nadica, 2018. "Performance Evaluation of Stocks’ Valuation Models at MSE," Economic and Regional Studies / Studia Ekonomiczne i Regionalne, Sciendo, vol. 11(2), pages 7-23, June.
    5. Ansay, Thomas, 2009. "Firm valuation: tax shields & discount rates," MPRA Paper 23027, University Library of Munich, Germany, revised 20 May 2010.
    6. Lin, Woon Leong & Ho, Jo Ann & Sambasivan, Murali & Yip, Nick & Mohamed, Azali Bin, 2021. "Influence of green innovation strategy on brand value: The role of marketing capability and R&D intensity," Technological Forecasting and Social Change, Elsevier, vol. 171(C).
    7. Teng Andrea Xu & Jiahua Xu & Kristof Lommers, 2022. "DeFi vs TradFi: Valuation Using Multiples and Discounted Cash Flow," Papers 2210.16846, arXiv.org.
    8. Giulio Bottazzi & Francesco Cordoni & Giulia Livieri & Stefano Marmi, 2020. "Stock Recommendations from Stochastic Discounted Cash Flows," LEM Papers Series 2020/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    9. Borges da Silva, Eduardo & Moreno Cordeiro de Sousa, Alexandre, 2022. "Avaliação econômico-financeira de fintechs no mercado brasileiro: o caso INTER [Economic and financial evaluation of fintech in the Brazilian market: the case of INTER]," MPRA Paper 115509, University Library of Munich, Germany.
    10. Altavilla, Carlo & Burlon, Lorenzo & Maruhn, Franziska & Begenau, Juliane, 2024. "Determinants of bank performance: evidence from replicating portfolios," Working Paper Series 2937, European Central Bank.
    11. Frederick DUBE & Brian BARNARD, 2019. "Equity Valuation based on a Random Process Modelling of Earnings and Equity Growth," Expert Journal of Economics, Sprint Investify, vol. 7(1), pages 1-31.
    12. Samer Ajour El Zein & Carolina Consolacion-Segura & Ruben Huertas-Garcia, 2019. "The Role of Sustainability in Brand Equity Value in the Financial Sector," Sustainability, MDPI, vol. 12(1), pages 1-19, December.

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