Valuation Biases, Error Measures, and the Conglomerate Discount
We investigate biases of valuation methods and document that these depend largely on the choice of error measure (percentage vs. logarithmic errors) used to compare valuation procedures. We analyze four multiple valuation methods (averaging with the arithmetic mean, harmonic mean, median, and the geometric mean) and three present value approaches (dividend discount model, discounted cash flow model, residual income model). Percentage errors generate a positive bias for most multiples, and they imply that setting company values equal to their book values often becomes the best valuation method. Logarithmic errors avoid unwanted consequences and imply that the median and the geometric mean are unbiased while the arithmetic mean is biased upward as much as the harmonic mean is biased downward. The dividend discount model dominates the DCF-model only for percentage errors, while the opposite is true for logarithmic errors. The residual income model is optimal for both error measures.
Year of publication: |
2007-06-26
|
---|---|
Authors: | Dittmann, Ingolf ; Maug, Ernst |
Institutions: | Sonderforschungsbereich 504 "Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung", Abteilung für Volkswirtschaftslehre ; Sonderforschungsbereich 504, University of Mannheim |
Saved in:
freely available
Extent: | application/pdf |
---|---|
Series: | |
Type of publication: | Book / Working Paper |
Notes: | Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. The text is part of a series sfbmaa Number 07-37 39 pages |
Source: |
Persistent link: https://www.econbiz.de/10005463689
Saved in favorites
Similar items by person
-
Bankers and the Performance of German Firms
Maug, Ernst, (2007)
-
Executive Stock Options when Managers are Loss-Averse
Dittmann, Ingolf, (2007)
-
How Preussag became TUI: Kissing too Many Toads Can Make You a Toad
Dittmann, Ingolf, (2007)
- More ...