Do Valuation Multiples Reflect a Size Effect?
28 Pages Posted: 1 Oct 2015
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: Suggested Citation