Do Valuation Multiples Reflect a Size Effect?

28 Pages Posted: 1 Oct 2015

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Rajiv Gokhale

Compass Lexecon

Date Written: September 29, 2015

Abstract

In this paper, we empirically examine whether there is evidence to support the hypothesis that a size premium is impounded in valuation multiples. Overall, we find essentially no evidence to support the hypothesis. One interpretation of this finding is that there is no size effect in current U.S. data. If that is true, then size premiums should not be added to the discount rate and there is no potential inconsistency with the market multiples approach. However, if an appraiser chooses to add a size premium to the discount rate based on historical return data such as that reported by Ibbotson, it raises the possibility the DCF value indicator will be inconsistent with the value indicator based on market multiples. Given the fact that virtually all corporate appraisals include both a DCF and a market multiples analysis our work suggests that the two approaches should be blended with care in situations where a size premium is contemplated.

Keywords: Valuation Market Multiples Size Effect

JEL Classification: G12, G30

Suggested Citation

Cornell, Bradford and Gokhale, Rajiv, Do Valuation Multiples Reflect a Size Effect? (September 29, 2015). Available at SSRN: https://ssrn.com/abstract=2667313 or http://dx.doi.org/10.2139/ssrn.2667313

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Rajiv Gokhale

Compass Lexecon ( email )

United States

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