Empirische Analyse der Unternehmensbewertung für die Erbschaftsteuer mit dem vereinfachten Ertragswertverfahren (Empirical Analysis of Firm Valuation for Inheritance Tax Purposes Using the Simplified Discounted Cash Flow Method)
Arqus Quantitative Tax Research Discussion Paper No. 6
63 Pages Posted: 1 Oct 2012
Date Written: September 29, 2012
Besides the valuation methods commonly used for specific industries, taxpayers can fall back on the simplified discounted cash flow method which, in certain cases, obliterates the need for complex valuations and replaces what is known as the Stuttgart Method for valuing shares in unlisted corporations or the equity-based valuation of partnerships. We examine to what extent this legally codified method allows for a near-market valuation of company assets. We use the share price of listed corporations as an indication of the market value of unlisted firms, which is legislator's primary goal for valuing companies for inheritance tax purposes. Applying a sample of German listed and unlisted companies, it immediately emerges that the new method leads to fewer misvaluations than the previous approach. However, it is also shown that the simplified discounted cash flow method produces more dispersed misvaluations than the old-style valuation method, which can lead to inconsistent treatment of different kinds of assets from an inheritance tax perspective. We use matching procedures to derive results for the mean undervaluation of unlisted companies. There is no significant difference in the degree of misvaluation between the means for corporations and those for partnerships. However, we find a considerably greater range of valuation differences from one partnership to another. Overall, the range of misvaluations is greater for unlisted companies than it is for listed companies. We can conclude that the simplified discounted cash flow method not only fails to produce a precise enough approximation of a company's market value; it also offers no notable improvements compared to the method preferred under the previous legislation. The only merit it appears to have is greater consistency when it comes to valuing a variety of legal forms, indicating greater neutrality in regard to the legal form of a company.
Note: Downloadable document is in German.
Keywords: discounted cash flow method, firm value, inheritance tax, private companies, valuation
JEL Classification: D63, G12, H24, H29, M41
Suggested Citation: Suggested Citation