The Choice of Valuation Techniques in Practice: Education Versus Profession

Abstract

We use a survey approach to learn about valuation professionals' choices and implementations of valuation techniques in practice. Most use both multiples and DCF, but implement DCF in a way that almost turns it into a multiples exercise. Confusion reigns with respect to interest tax shields and the WACC. Higher educational levels do not reduce the confusion. The survey design allows us to control for a respondent's professional subgroup(e.g., consulting), education, experience, and valuation-purpose characteristics. We find that profession matters more than education; different professions have different valuation cultures. Other factors are less important. The relative unimportance of education raises questions about the role, benefit, and optimal mode of higher level finance education.

Analysts’ estimates of the cost of equity capital

“…Further, we find that CoE estimates are systematically related to a firm's beta, bookto-market ratio, size, leverage, and idiosyncratic volatility but unrelated to profitability, investments, price momentum, short-term return reversals, and liquidity. Our evidence that analysts give weight to market beta, firm size, and book-to-market ratio is partly consistent with the recent survey results of Mukhlynina and Nyborg (2016). They find that approximately three-quarters of respondents claim to regularly use the capital asset pricing model (CAPM) to estimate discount rates.…”

“…The coefficient on beta is 0.35 (tstatistic = 4.58) in column (1), and declines to about 0.30 in columns ( 2) and (3) when other firm characteristics are controlled for. 23 The positive coefficient on beta is largely in line with the evidence in Mukhlynina and Nyborg (2016), who report that 76% of surveyed analysts almost always or always use the CAPM.…”

“…Consequently, it is not possible to scrutinize, compensate or otherwise incentivize analysts to expend time or effort on these estimates. Consistent with the notion that analysts expend little effort on discount rate estimates, studies examining a small sample of analyst reports and survey responses have shown that analysts' discount rate estimates suffer from significant execution errors and questionable choices (Green, Hand and Zhang, 2016;Mukhlynina and Nyborg, 2016). Supporting the view that analysts' CoE estimates are not very systematic or meaningful, Mukhlynina and Nyborg (2016) provide this quote from a survey respondent: "There seem to be lots of academics asking how analysts in the real world use CAPM or calculate the cost of capital.…”

“…As seen in column (3) in Table 4, other than beta, analysts' CoE estimates also reflect the effects of book-to-market ratio, size, leverage, and idiosyncratic volatility. The significant coefficients on book-to-market ratio and size are interesting, as Mukhlynina and Nyborg (2016) find that less than 5% of survey respondents report using the Fama-French three-factor model.…”

Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting*

“…Both expenditures reduce free cash flow, a key determinant of firm value in DCF models (Damodaran, 2007). Survey evidence shows that 76% of market participants use both earnings-based multiples and DCF models to value firms (Mukhlynina and Nyborg, 2019).…”