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An alternative approach to firms’ evaluation: expert systems and fuzzy logic

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  • Magni, Carlo Alberto

Abstract

Discounted Cash Flow techniques are the generally accepted methods for valuing firms. Such methods do not provide explicit acknowledgment of the value determinants and overlook their interrelations. This paper proposes a different method of firm valuation based on fuzzy logic and expert systems. It does represent a conceptual transposition of Discounted Cash Flow techniques but, unlike the latter, it takes explicit account of quantitative and qualitative variables and their mutual integration. Financial, strategic and business aspects are considered by focusing on twenty-nine value drivers that are combined together via “if-then” rules. The output of the system is a real number in the interval [0,1], which represents the value-creation power of the firm. To corroborate the model a sensitivity analysis is conducted. The system may be used for rating and ranking firms as well as for assessing the impact of managers’ decisions on value creation and as a tool of corporate governance.

Suggested Citation

  • Magni, Carlo Alberto, 2004. "An alternative approach to firms’ evaluation: expert systems and fuzzy logic," MPRA Paper 7879, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:7879
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    Cited by:

    1. Carlo Alberto Magni & Stefano Malagoli & Andrea Marchioni & Giovanni Mastroleo, 2020. "Rating firms and sensitivity analysis," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 71(12), pages 1940-1958, December.
    2. Magni, Carlo Alberto, 2007. "Investment decisions, equivalent risk and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany.
    3. Fahimeh Aliakbari Nouri & Mohsen Shafiei Nikabadi & Laya Olfat, 2019. "The Role of Supply Chain Features in the Effectiveness of Sustainability Practices in the Service Supply Chain: Application of Fuzzy Rule-Based System," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 867-899, May.
    4. Simona Cosma & Giovanni Mastroleo & Paola Schwizer, 2018. "Assessing corporate governance quality: substance over form," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 457-493, June.
    5. Magni, Carlo Alberto, 2004. "Rating and ranking firms with fuzzy expert systems: the case of Camuzzi," MPRA Paper 5889, University Library of Munich, Germany.
    6. Tomasz Korol & Anestis Fotiadis, 2016. "Applying Fuzzy Logic of Expert Knowledge for Accurate Predictive Algorithms of Customer Traffic Flows in Theme Parks," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 15(06), pages 1451-1468, November.
    7. Marc Sanchez-Roger & María Dolores Oliver-Alfonso & Carlos Sanchís-Pedregosa, 2019. "Fuzzy Logic and Its Uses in Finance: A Systematic Review Exploring Its Potential to Deal with Banking Crises," Mathematics, MDPI, vol. 7(11), pages 1-22, November.

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    More about this item

    Keywords

    Firms’ evaluation; fuzzy logic; expert system; rating; acquisition; sensitivity analysis;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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