The Characteristics, Valuation Methods, and Information Use of Valuation Specialists

Abstract

We provide insights into the inputs and valuation models used by valuation specialists. We survey 172 valuation specialists and conduct several follow-up interviews covering various topics, including the valuation inputs, models, and industry information that they use, as well as how they estimate long-term growth and the cost of capital. We find that valuation specialists rely on their professional judgment to select a valuation model but prefer the discounted cash flow (DCF) model. They primarily rely on the firm's historical performance when forecasting the financial statements, but communication with management is particularly relevant for forecasting future earnings or cash flows. When estimating the cost of capital, they most commonly use the risk-free rate with subjective adjustments. The results of our study provide insights on the information use of valuation specialists that are relevant to other valuation specialists, managers, academic researchers, and regulators.

The Production of Value Opinions by Specialized Valuers: Practical Sense and the Enactment of Judgment*

“…Experts sharing similar expertise should not be assumed to approach their expertise homogeneously (Durocher and Gendron 2014), since lived experience can tint the practical sense of experts with different shades and alter how expertise is enacted. This adds to the work of Allee et al (2020) which finds that views on valuation vary according to specialization. In fact, valuers with different asset-type specializations may conduct valuation in a more similar manner than valuers sharing an asset type's specialization, as dissonance may arise even among experts sharing a similar expertise (Georgiou 2018).…”

“…Our insights on how value opinions are shaped by practical sense suggest that exploring the different shades this sense might take on in other populations of valuers may be a worthwhile endeavor. As such, future studies could analyze the conditions that lead specialized valuers to favor certain valuation approaches (Allee et al 2020). Furthermore, the multitude of issues and empirical settings to explore would benefit from research grounded in different paradigms.…”

Two minds of credit professionals: accrual vs. cash accounting information

“…Recent survey studies commonly report results based on low response rates of less than 10%. For example, inLibby and Rennekamp (2016) the response rate is 3% (110 responses),Brown et al (2015) 10.9% (365 participants),Graham et al (2005) 8.4%,Drake et al (2019) 3.8 % (408), andAllee et al (2020) 2.5% (172). A notable exception isJong et al (2014) with a response rate of 48% and a sample of 306 analysts' in world largest investment banks.…”

Two minds of credit professionals: accrual vs. cash accounting information

“…Recent survey studies commonly report results based on low response rates of less than 10%. For example, inLibby and Rennekamp (2016) the response rate is 3% (110 responses),Brown et al (2015) 10.9% (365 participants),Graham et al (2005) 8.4%,Drake et al (2019) 3.8 % (408), andAllee et al (2020) 2.5% (172). A notable exception isJong et al (2014) with a response rate of 48% and a sample of 306 analysts' in world largest investment banks.…”