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Abstract

This paper contains a classified collection of 110 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes. We classify the errors into six main categories: 1) errors in the discount rate calculation and concerning the riskiness of the company; 2) errors when calculating or forecasting the expected cash flows; 3) errors in the calculation of the residual value; 4) inconsistencies and conceptual errors; 5) errors when interpreting the valuation; and 6) organizational errors.

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File URL: http://www.iese.edu/research/pdfs/DI-0714-E.pdf
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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/714.

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Length: 40 pages
Date of creation: 05 Nov 2007
Date of revision:
Handle: RePEc:ebg:iesewp:d-0714

Contact details of provider:
Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: company valuation; valuation errors; valuation;

Find related papers by JEL classification:

• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
• G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
• M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics

This paper has been announced in the following NEP Reports:

• NEP-ALL-2008-02-02 (All new papers)
• NEP-CFN-2008-02-02 (Corporate Finance)
• NEP-FMK-2008-02-02 (Financial Markets)

References

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1. Campa, Jose M. & Kedia, Simi, 2000. "Explaining the diversification discount," IESE Research Papers D/424, IESE Business School.
   
   • Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, 08.
   • José Manuel Campa & Simi Kedia, 1999. "Explaining the Diversification Discount," Working Papers 99-06, New York University, Leonard N. Stern School of Business, Department of Economics.
2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
   
   • Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
3. Kaminsky, Graciela & Schmukler, Sergio, 2001. "Emerging markets instability: do sovereign ratings affect country risk and stock returns?," Policy Research Working Paper Series 2678, The World Bank.
   
   • Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," World Bank Economic Review, World Bank Group, vol. 16(2), pages 171-195, August.
4. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
5. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
6. Knez, Peter J & Ready, Mark J, 1997. " On the Robustness of Size and Book-to-Market in Cross-Sectional Regressions," Journal of Finance, American Finance Association, vol. 52(4), pages 1355-82, September.
7. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
8. Erik Durbin & David Tat-Chee Ng, 1999. "Uncovering country risk in emerging market bond prices," International Finance Discussion Papers 639, Board of Governors of the Federal Reserve System (U.S.).
9. Wang, Xiaozu, 2000. "Size effect, book-to-market effect, and survival," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 257-273, December.
10. Bruner, Robert F. & Conroy, Robert M. & Estrada, Javier & Kritzman, Mark & Li, Wei, 2002. "Introduction to 'Valuation in Emerging Markets'," Emerging Markets Review, Elsevier, vol. 3(4), pages 310-324, December.
11. Donald R. Lessard, 1996. "Incorporating Country Risk In The Valuation Of Offshore Projects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 52-63.
12. Fernandez, Pablo, 2003. "How to value a seasonal company by discounting cash flows," IESE Research Papers D/511, IESE Business School.
13. Jacques Hamon & Bertrand Jacquillat, 1999. "Is there Value‐Added Information in Liquidity and Risk Premiums?," European Financial Management, European Financial Management Association, vol. 5(3), pages 369-394.

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Cited by:

1. Wiktor Patena, 2011. "Company Valuation. How to Deal with a Range of Values?," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 7(3), pages 75-84, November.

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