Did Adoption of Forward-Looking Valuation Methods Improve Valuation Accuracy in Shareholder Litigation?

33 Pages Posted: 20 Jun 2006 Last revised: 6 Nov 2007

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Kenton K. Yee

Independent

Yong Keun Yoo

Korea University Business School

Abstract

Prior to 1984, Delaware judges relied exclusively on the Delaware Block method - an appraisal formula based on trailing earnings and liquidation value - to price shares in shareholder litigation. In 1984, the Delaware Supreme Court changed the law to permit its judges to use any valuation method they deem appropriate. As a result, judges and litigants began switching away from the Block method and adopting forward-looking valuation techniques based on cash flow and earnings forecasts. While the use of forward-looking methods potentially improves valuation accuracy by incorporating forecast information, the use of forecasts allows more room for subjective manipulation. Did the adoption of forward-looking methods improve or reduce valuation accuracy in shareholder litigation? We address these questions using a comprehensive hand-collected sample of all Delaware corporate appraisal-remedy cases published between 1966 and 2002 in Lexis-Nexis. The sample identifies, on a case-by-case basis, the plaintiff's, the defendant's, and the judge's valuation methods and resulting valuation estimates. We show that the adoption of forward-looking valuation methods improves litigants' valuation accuracy on average.

Keywords: equity valuation, earnings forecasts, Delaware, shareholder litigation

JEL Classification: G12, G34, K00, M41

Suggested Citation

Chen, Feng and Yee, Kenton K. and Yoo, Yong Keun, Did Adoption of Forward-Looking Valuation Methods Improve Valuation Accuracy in Shareholder Litigation?. Journal of Accounting, Auditing and Finance, Vol. 22, No. 4, pp. 573-598, Fall 2007. Available at SSRN: https://ssrn.com/abstract=909766

Feng Chen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kenton K. Yee (Contact Author)

Independent ( email )

No Address Available

Yong Keun Yoo

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Register to save articles to
your library

Register

Paper statistics

Downloads
414
Abstract Views
5,135
rank
71,542
PlumX Metrics