Political Uncertainty, Financial Crisis and Market Volatility

19 Pages Posted: 2 Dec 2004

See all articles by Jianping Mei

Jianping Mei

New York University (NYU) - Department of Finance

Limin Guo

Government of Shenzhen - Municipal Planning Commission

Abstract

This paper studies how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists. We measure investment performance by the amount of investments they need to write off and by the number of companies they take public. We find that a significant number of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital. The majority applies DCF using subjective discount rates. We present evidence that the use of DCF is correlated with superior investment performance only if applied in conjunction with an objectifiable discount rate. Also, funds that invest with a longer horizon perform better. The use of multiples is not significantly correlated with investment performance. We conclude that a focus on fundamental values confers an advantage.

Suggested Citation

Mei, Jianping and Guo, Limin, Political Uncertainty, Financial Crisis and Market Volatility. European Financial Management, Vol. 10, No. 4, pp. 639-657, December 2004. Available at SSRN: https://ssrn.com/abstract=619487

Jianping Mei (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

Limin Guo

Government of Shenzhen - Municipal Planning Commission

Shenzhen
China

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