The Implied Private Company Pricing Line (IPCPL): On the Nature, Scope, and Assumptions of IPCPL Theory

21 Pages Posted: 23 May 2015 Last revised: 21 Jun 2015

See all articles by David H Goodman

David H Goodman

Gosule, Butkus, & Jesson LLP

Malcolm McLelland

McLelland + Palazzi | Financial economics

Date Written: June 19, 2015

Abstract

The Implied Private Company Pricing Line (IPCPL) was introduced to the business valuation literature by Dohmeyer, Burkert, and Butler (2013) and Dohmeyer and Butler (2012) as a means of using public equity market data to estimate the (fair market) value of small- and medium-sized privately-held enterprises. The IPCPL is based on the fundamental assumption that no arbitrage opportunities exist, between privately-held and publicly-held equity. This is the fundamental assumption underlying modern asset pricing theory. Although Dohmeyer, Burkert, and Butler (2013) present a detailed general discussion and example of applying their IPCPL model, a formal theoretical development and reconciliation of their model to existing asset pricing theory does not exist in the literature. We (i) present a formal development of IPCPL theory based on arbitrage pricing theory (Ross 1976), (ii) derive the assumptions under which the theory holds and the essential empirical predictions of the model, and (iii) present an empirical model which can be used to test the theory and estimate parameters useful in estimating the value of privately-held equity interests.

Keywords: asset pricing theory, no-arbitrage pricing, private equity, business valuation

JEL Classification: G12, G24

Suggested Citation

Goodman, David H and McLelland, Malcolm, The Implied Private Company Pricing Line (IPCPL): On the Nature, Scope, and Assumptions of IPCPL Theory (June 19, 2015). Available at SSRN: https://ssrn.com/abstract=2609159 or http://dx.doi.org/10.2139/ssrn.2609159

David H Goodman (Contact Author)

Gosule, Butkus, & Jesson LLP ( email )

480 Adams St # 1
Milton, MA 02186
United States

Malcolm McLelland

McLelland + Palazzi | Financial economics ( email )

Rua Padre Carvalho 408
Pinheiros
Sao Paulo, Sao Paulo 05427-020
Brazil

HOME PAGE: http://www.mclelland-palazzi.com.br

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