A Valuation Formula for Firms in the Early Stage of Their Lifecycle

34 Pages Posted: 7 Apr 2004

See all articles by Christophe Faugère

Christophe Faugère

Kedge Business School Bordeaux

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Date Written: April 2000

Abstract

We develop a valuation formula for analyzing high growth firms using the stages of an industry lifecycle. Our model is best suited for start-up firms with low (or negative) earnings and low sales. Our formula uses start-up firm data and captures the firm's growth potential by incorporating data about two key stages along the lifecycle. One stage corresponds to the largest firm in the industry and the other to the firm situated at the inflection point of the S-shaped curve describing the lifecycle. We test the formula by examining the biotechnology industry in the late 1990s. An empirical analysis of the biotechnology industry reveals an important correlation between market values growth rates and assets growth rates, which is predicted by our formula. We find that on average, our formula underestimates the actual market value of biotechnology start-up firms by about 15%.

Keywords: Valuation, High Tech Stocks, Industry Lifecycle

JEL Classification: G12

Suggested Citation

Faugère, Christophe and Shawky, Hany A., A Valuation Formula for Firms in the Early Stage of Their Lifecycle (April 2000). Available at SSRN: https://ssrn.com/abstract=525546 or http://dx.doi.org/10.2139/ssrn.525546

Christophe Faugère (Contact Author)

Kedge Business School Bordeaux ( email )

680 Cours de la Liberation
Bordeaux, Aquitaine 33405
France

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

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