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

92 Pages Posted: 14 Jun 2010  

Aswath Damodaran

New York University - Stern School of Business

Date Written: June 14, 2010

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, Valuation Approaches and Metrics: A Survey of the Theory and Evidence (June 14, 2010). Foundations and Trends in Finance, Vol. 1, No. 8, 2005. Available at SSRN: https://ssrn.com/abstract=1625010

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

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