Valuing Illiquid Equity Securities in Light of the Financial Crisis of 2007-2009

Abstract

Though practitioners and academics rely on similar conceptual frameworks when valuing illiquid equity securities, they emphasize different aspects of the framework. In contrast to academics, practitioners emphasize market multiples, implied equity market risk premiums, industry betas, and market sentiment; while deemphasizing delevering and relevering betas, debt betas, and historical equity market risk premiums. Moreover, experienced practitioners and the courts prefer a holistic approach to valuation ensuring that inputs such as discount rates, cash flows, and terminal value multiples are consistent with underlying economic fundamentals -- a point that has been driven home during the recent crisis.