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The Choice of Valuation Techniques in Practice: Education versus Profession

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  • Mukhlynina, Lilia
  • Nyborg, Kjell G

Abstract

We use a survey approach to learn about valuation professionals' choices and implementations of valuation techniques in practice. The survey design allows us to control for a respondent's professional subgroup (e.g., consulting), education, experience, and valuation purpose characteristics. We find support for the 'sociological hypothesis' that profession matters more than education; different professions have different valuation cultures. Other factors are less important. There are also many commonalities across respondents. 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. Our overall findings matter because valuation professionals function as intermediaries in the capital allocation process. The relative unimportance of education raises questions about the role and benefit of higher level finance education.

Suggested Citation

  • Mukhlynina, Lilia & Nyborg, Kjell G, 2016. "The Choice of Valuation Techniques in Practice: Education versus Profession," CEPR Discussion Papers 11303, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11303
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    References listed on IDEAS

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    1. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 719-730, September.
    2. Ian A. Cooper & Kjell G. Nyborg, 2008. "Tax‚ÄźAdjusted Discount Rates with Investor Taxes and Risky Debt," Financial Management, Financial Management Association International, vol. 37(2), pages 365-379, June.
    3. Alford, Aw, 1992. "The Effect Of The Set Of Comparable Firms On The Accuracy Of The Price Earnings Valuation Method," Journal of Accounting Research, Wiley Blackwell, vol. 30(1), pages 94-108.
    4. Glen C. Arnold & Panos D. Hatzopoulos, 2000. "The Theory-Practice Gap in Capital Budgeting: Evidence from the United Kingdom," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(5&6), pages 603-626.
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    Cited by:

    1. Olivier, Jacques & Dessaint, Olivier & Otto, Clemens A. & Thesmar, David, 2017. "CAPM-Based Company (Mis)valuations," HEC Research Papers Series 1235, HEC Paris, revised 20 Mar 2018.

    More about this item

    Keywords

    DCF; finance education; multiples; sociological hypothesis; Valuation; valuation cultures;

    JEL classification:

    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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