An Alternative Approach to Firms' Evaluation: Expert Systems and Fuzzy Logic
Carlo Alberto Magni
University of Modena and Reggio Emilia - Department of Economics
Università degli studi di Modena e Reggio Emilia (UNIMORE)
Università degli Studi della Calabria
International Journal of Information Technology and Decision Making, Vol. 5, No. 1, pp. 195-225, March 2006
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.
Number of Pages in PDF File: 22
Keywords: firms' evaluation, fuzzy logic, expert system, rating, acquisition, sensitivity analysis, pricing
JEL Classification: C8, C80, C88, G3, G31, G32, G34, M2Accepted Paper Series
Date posted: November 23, 2007
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