A Valuation Formula for Firms in the Early Stage of their Lifecycle

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A Valuation Formula for Firms in the Early Stage of their Lifecycle

Author Info

Christophe Faugere (School of Business U at Albany, NY)
Hany Shawky (School of Business U at Albany, NY)

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Christophe Faugere

Abstract

We develop a valuation formula for analyzing high growth firms using the stages of an industry lifecycle. Our model is best suited for start-up firms with low (or negative) earnings and low sales. Our formula uses start-up firm data and captures the firm’s growth potential by incorporating data about two key stages along the lifecycle. One stage corresponds to the largest firm in the industry and the other to the firm situated at the inflection point of the S-shaped curve describing the lifecycle. We test the formula by examining the biotechnology industry in the late 1990s. An empirical analysis of the biotechnology industry reveals an important correlation between market values growth rates and assets growth rates, which is predicted by our formula. We find that on average, our formula underestimates the actual market value of biotechnology start-up firms by about 15%.

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Paper provided by EconWPA in its series Finance with number 0404001.

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Length: 34 pages
Date of creation: 01 Apr 2004
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Handle: RePEc:wpa:wuwpfi:0404001

Note: Type of Document - pdf; pages: 34
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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-04-04 (All new papers)
NEP-CFN-2004-04-04 (Corporate Finance)
NEP-ENT-2004-04-04 (Entrepreneurship)

References listed on IDEAS
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Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," Journal of Business, University of Chicago Press, vol. 34, pages 411. [Downloadable!]
Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February. [Downloadable!] (restricted)
Jonathan B. Berk & Richard C. Green & Vasant Naik, 1999. "Optimal Investment, Growth Options, and Security Returns," Journal of Finance, American Finance Association, vol. 54(5), pages 1553-1607, October. [Downloadable!] (restricted)

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