Equity Valuation Science, Art, or Craft?

138 Pages Posted: 16 Oct 2018

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Sergio M. Focardi

Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV)

Caroline Jonas

Intertek Group France

Date Written: September 24, 2018

Abstract

The price at which a stock is traded in the market reflects the ability of the firm to generate cash flow and the risks associated with generating the expected future cash flows. The authors point to the limits of widely used valuation techniques. The most important of these limits is the inability to forecast cash flows and to determine the appropriate discount rate. Another important limit is the inability to determine absolute value. Widely used valuation techniques such as market multiples - the price-to-earnings ratio, firm value multiples or a use of multiple ratios, for example - capture only relative value, that is, the value of a firm's stocks related to the value of comparable firms (assuming that comparable firms can be identified).

The study underlines additional problems when it comes to valuing IPOs and private equity: Both are sensitive to the timing of the offer, suffer from information asymmetry, and are more subject to behavioral elements than is the case for shares of listed firms. In the case of IPOs in particular, the authors discuss how communication strategies and media hype play an important role in the IPO valuation/pricing process.

Suggested Citation

Fabozzi, Frank J. and Focardi, Sergio M. and Jonas, Caroline, Equity Valuation Science, Art, or Craft? (September 24, 2018). CFA Institute Research Foundation Publications, December 2017, Volume 2017, Issue 4 . Available at SSRN: https://ssrn.com/abstract=3254580 or http://dx.doi.org/10.2139/ssrn.3254580

Frank J. Fabozzi (Contact Author)

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Sergio M. Focardi

Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV)

92916 Paris La Defense Cedex
France

Caroline Jonas

Intertek Group France

67, BD Bessières
Paris, 75017
France

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