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Valuation Approaches and Metrics: A Survey of the Theory and Evidence

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  • Damodaran, Aswath

Abstract

Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.

Suggested Citation

  • Damodaran, Aswath, 2007. "Valuation Approaches and Metrics: A Survey of the Theory and Evidence," Foundations and Trends(R) in Finance, now publishers, vol. 1(8), pages 693-784, April.
  • Handle: RePEc:now:fntfin:0500000013
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    File URL: http://dx.doi.org/10.1561/0500000013
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    Cited by:

    1. Ansay, Thomas, 2009. "Firm valuation: tax shields & discount rates," MPRA Paper 23027, University Library of Munich, Germany, revised 20 May 2010.
    2. William R. Cline, 2015. "Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks," Working Paper Series WP15-8, Peterson Institute for International Economics.

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