A critical review and synthesis of the valuation and other relevant literature
Students will be expected to produce a comprehensive summary and critique of the relevant academic literature relating to the use of accounting numbers in business valuation. At a minimum, students must ensure that they address the following areas as part of their review:
The theoretical links between accounting numbers and firm value, including some consideration of both multiples-based valuation approaches and models using forecasts of accounting flows (e.g., the free cash flow model, the residual income valuation model, and the abnormal earnings growth model);
- The implementation issues and the advantages and disadvantages (both theoretical and practical) associated with using different valuation approaches;
- The empirical evidence regarding the application of these valuation models.
2. Large sample statistical analysis
The analysis is intended to compare the performance of valuation models on a large sample of firms under specific contexts. The following steps represent core non-negotiable elements that a dissertation must contain to fulfil the requirements.
Please note: the following steps simply provide a structure for your analysis. It is your task to identify specific research questions and develop testable predictions based on extant theory and empirical evidence.
Step 1
- Compute value estimates for a large sample of firm-years using two flows-based models;
- Compute value estimates for a large sample of firm-years using two multiples models. (Note that
in the case of the price earnings multiple, different earnings constructs count as different models.)
Required
1. Compare the properties of value estimates for the four valuation models selected in step 1 and draw conclusions about absolute and relative model performance;
2. For your two flows-based models, present evidence on the relative importance of the terminal value component and assess the sensitivity of model performance to the terminal value
assumptions;
3. For your two multiples models, assess the sensitivity of value estimates to peer selection and the averaging method used to compute the pricing multiple.
- Step 2
- Use one of your flows-based models to create decile portfolios for your sample based on the pricing accuracy for that model;
Use one of your multiple models to create decile portfolios for your sample based on the pricing
accuracy for that model.
Required
Draw conclusions about factors affecting the absolute and relative pricing performance of accounting-based flows models and multiples models by comparing the characteristics of firm-years in the two lowest pricing accuracy portfolios with features of firm-years in the two highest pricing accuracy portfolios.