This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
See also section 3.2.1.4. Clearly, if appraisers correctly account for the growth rate of free cash flows then CCV is also possible using these cash flows as a basis of reference. However, while it is very difficult to determine the growth rate of financial benefits in general (see section 4.2.2.5) it is almost impossible to determine the growth rate of free cash flows of a company that is not in equilibrium, see Bamberger (1999: 658–660).
Sometimes it is even unknown that the growth rate actually is a fundamental similarity requirement: “For example, application of a price earnings multiple does not require explicit specification of a firm’s cost of capital or growth rate.” Palepu et al. (1996: chapter 7, 16).
The following outlines are mainly based on Meitner (2005).
Recent exceptions are provided by Albrecht (2004); Chan et al. (2003) and Henselmann (2000).
A contrary opinion is provided by Herrmann (2002 who found that consensus forecasts for earnings have at least partial explanation power for the long-term growth rate of earnings, see Herrmann (2002: 234).
In direct valuation approaches, such as the DCF-method or the earnings capitalisation variants, it is appreciable to perform a detailed forecast of cash flows until companies reach the steady state. Once this date is reached, the Gordon Growth Model can be applied to determine the terminal value, see Peemöller and Kunowski (2005: 230). CCV, however, requires the growth rate as from the date of valuation.
The set of company-specific influences (profitability, dividend policy, external financing possibilities) is drawn based on Benninga and Sarig (1997: 317–318).
Certainly, accounting for industry and profitability cannot totally substitute the growth rate of financial benefits. However, the outlines above showed that it seems to be a good proxy. In this context, the importance of profitability is also supported by recent research: An international study found that in CCV comparable company selection based on profitability outperforms comparables selection based on industry classification, see Dittmann and Weiner (2005).
Sometimes it is mentioned that one of the disadvantages of the PEG ratio is that it cannot eliminate the influence of the cost of capital, see e.g. Schwetzler (2003: 82). This elimination, however, is not one of the aims of the PEG ratio; the cost of capital rather has to be considered as a similarity criterion when putting together the set of comparable companies.
A similar opinion is provided by Adrian (2005: 81).
These models are very similar to the Fama-French multi-factor model and certain variants of the arbitrage pricing theory; for these models see e.g. Fama and French (1993); Copeland et al. (2005: 873–875); as regards the German market see Ziegler et al. (2003).
Most studies do not properly account for the “information not yet captured by the accounting system”. Therefore, they cannot be seen as actual tests of the Ohlson model, see Lo and Lys (2000a).
See Herrmann (2002: 115); Beaver and Morse (1978: 72); Zarowin (1990: 448); Damodaran also includes the payout ratio as an independent variable into his analysis, see Damodaran (2001a: 294).
The following outlines are mainly based on Meitner (2003a) and Meitner (2004).
In empirical tests of the Ohlson model, persistence parameters are not drawn from comparable companies but from historical data of the target company. Ohlson himself assumes the persistence parameter to be constant over time; see Ohlson (1995): 686, Ohlson (2001: 110). However, from an appraiser’s point of view this approach seems to be highly debateable, because of quick changing market conditions and industry characteristics.
The concept of the model applied here is comparable with the concept of one of the models in Beatty et al. (1999); a similar model has been presented by Ramakrishnan and Thomas (1992: 442–447).
It can be shown that future dividends are irrelevant even if the accounting is not perfectly clean surplus and even if the “value — reference variable“ association is non linear due to the existence of abandonment options, see Yee (2005). This finding is of paramount importance for the following sections.
While the Ohlson model assumes risk neutrality of all investors, see Ohlson (1995: 665–666), this model also works in the more realistic settings of investors’ risk aversion. Strictly speaking, a model extension that incorporates risk into the discount rates “lacks theoretical appeal”, Ohlson (1995: 680), but this is of minor importance here because the weightings are empirically determined and not theoretically derived.
As regards the option-style character of equity especially for distressed companies, see Damodaran (2002: 817–830). As regards the optimal date of reorganisation under uncertainty, see Richter (2002: 300–306).
This proceeding is based on the idea of Trigeorgis (1996: 12), and Burgstahler and Dichev (1997).
The uniformity of the cost of equity within one industry has been highlighted by the Deutsche Boerse AG (German Stock Exchange) until 2003 by publishing industry betas together with the CDAX industry sub-indexes on its homepage. This service has been discontinued in the course of the new-segmentation of the equity market and the associated disappearance of these sub-indexes. However, other providers still calculate and publish industry betas, e.g. DIT (2004: 6–7). A critical assessment of this beta uniformity within industries can be found in Timmreck (2004: 65).
Rights and permissions
Copyright information
© 2006 Physica-Verlag Heidelberg
About this chapter
Cite this chapter
(2006). Processing Comparable Company Valuation. In: The Market Approach to Comparable Company Valuation. ZEW Economic Studies, vol 35. Physica-Verlag HD. https://doi.org/10.1007/3-7908-1723-6_4
Download citation
DOI: https://doi.org/10.1007/3-7908-1723-6_4
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-7908-1722-5
Online ISBN: 978-3-7908-1723-2
eBook Packages: Business and EconomicsEconomics and Finance (R0)