Non‐Additivity in Accounting Valuation: Theory and Applications

36 Pages Posted: 17 Sep 2018

See all articles by Luc Paugam

Luc Paugam

HEC Paris, Accounting and Management Control Department

Jean-Francois Casta

University Paris-Dauphine - DRM Finance

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

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Date Written: September 2018

Abstract

This paper has three objectives. First, to introduce a theoretical solution to the issue of non‐additivity between assets in place, relying on an accounting‐based valuation approach. Second, to explain how such an approach can be implemented empirically by measuring synergies between assets. Third, to present the properties of this non‐additive valuation technique. We use Choquet capacities, that is, non‐additive aggregation operators, to measure the interactions between assets and apply our methodology to a sample of US firms from the capital goods industry. To operationalize our approach we examine the relationships between synergies—captured by Choquet capacities—and the market‐to‐book ratio (proxying for growth options), and show how interactions between assets are consistently linked to a firm’s market‐to‐book ratio. We also measure firm‐specific productive efficiency relative to the industry and firm size. For large firms, efficiency, as defined by our approach, is positively associated with higher future operating cash flows. For small firms, efficiency is positively associated with higher future sales growth. We document that the non‐additive approach appears to be better able to identify expected relationships between efficiency and future performance than a simpler approach based on the market‐to‐book ratio.

Keywords: Choquet capacities, Goodwill, Growth options, Non‐additive accounting‐based valuation, Productive efficiency, Synergies

Suggested Citation

Paugam, Luc and Casta, Jean-Francois and Stolowy, Hervé, Non‐Additivity in Accounting Valuation: Theory and Applications (September 2018). Abacus, Vol. 54, Issue 3, pp. 381-416, 2018, Available at SSRN: https://ssrn.com/abstract=3249689 or http://dx.doi.org/10.1111/abac.12125

Luc Paugam (Contact Author)

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

Jean-Francois Casta

University Paris-Dauphine - DRM Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75775
France

Hervé Stolowy

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

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