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A Valuation Formula for Firms in the Early Stage of their Lifecycle

Author

Listed:
  • Christophe Faugere

    (School of Business U at Albany, NY)

  • Hany Shawky

    (School of Business U at Albany, NY)

Abstract

We develop a valuation formula for analyzing high growth firms using the stages of an industry lifecycle. Our model is best suited for start-up firms with low (or negative) earnings and low sales. Our formula uses start-up firm data and captures the firm’s growth potential by incorporating data about two key stages along the lifecycle. One stage corresponds to the largest firm in the industry and the other to the firm situated at the inflection point of the S-shaped curve describing the lifecycle. We test the formula by examining the biotechnology industry in the late 1990s. An empirical analysis of the biotechnology industry reveals an important correlation between market values growth rates and assets growth rates, which is predicted by our formula. We find that on average, our formula underestimates the actual market value of biotechnology start-up firms by about 15%.

Suggested Citation

  • Christophe Faugere & Hany Shawky, 2004. "A Valuation Formula for Firms in the Early Stage of their Lifecycle," Finance 0404001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0404001
    Note: Type of Document - pdf; pages: 34
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0404/0404001.pdf
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    References listed on IDEAS

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    4. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
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    Cited by:

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    More about this item

    Keywords

    Valuation; High Tech Stocks; Industry Lifecycle.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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