Simulation-Based Business Valuation: Methodical Implementation in the Valuation Practice

Ernst, Dietmar

doi:10.3390/jrfm15050200

Cited by 12 publications

(22 citation statements)

References 27 publications

(30 reference statements)

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“…The general approach in risk mitigation has also been found in another research findings such as Sivitska and Makhmudov (2020) where the study identified that factors such business risk, operational risk, market risk, economic risk, industry risk, revenue growth, competition, diversification, employee relation are the main factors in determining risk in business valuation. Other studies include those by Ernst (2022), Scheurwater (2020), andGleißner (2019).…”

Section: Discussionmentioning

confidence: 99%

Identification of Risk Factors in Business Valuation

Razali

Jalil

Achu

et al. 2022

JRFM

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It is widely accepted that risk and uncertainty are integral parts of the property valuation process. Uncertainty in property valuation is derived from the characteristics of property itself. The issue pertaining to risk and uncertainty in property valuations is currently one of the key concerns in global valuation practice to date in addressing the decision of risk and uncertainty in valuation, especially for business purposes or in the current term known as business valuation. The judgment and experience still depend on the expertise of the individual valuers alone. The valuation methods used can cause problems if certain elements in business such as risk are highlighted, especially to determine market value. There is a need for valuers to express assumptions which take into account risk and uncertainties, and then pass on the results of the estimation process to the end user of the valuation report. This research employed Analytical Hierarchical Process (AHP) to identify the level of risk in business valuation for valuers to identify which risk areas will expose them to professional liabilities, which then leads to mitigation of risk to determine value in business valuations. AHP will also be able to identify the level of risk in each of the approaches in business valuation which could help valuers to determine the value and market value in the valuation process. This paper will propose some practical approaches of how to address the risk and uncertainty of the valuation process, especially for the purpose of business valuation.

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Section: Discussionmentioning

confidence: 99%

Identification of Risk Factors in Business Valuation

Razali

Jalil

Achu

et al. 2022

JRFM

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“…The approach suggested has the same basis in seminal earnings valuation theory (Ohlson 2005) as traditional valuation using the Capital Assets Pricing Model to estimate the cost of equity capital and variants thereof, such as the Fama and French (2015) five-factor model. Ernst (2022) acknowledges this situation throughout his paper. Hence, Ernst (2022) illustrates that in addressing the challenge of valuing non-listed entities, researchers have a responsibility to anchor their work in seminal theory.…”

Section: Implications Arising From the Paper About Simulation-based V...mentioning

confidence: 98%

“…Hence, Ernst (2022) illustrates that in addressing the challenge of valuing non-listed entities, researchers have a responsibility to anchor their work in seminal theory. Ernst (2022) contributes to the empirical finance literature via its sound motivation. Unlisted entities have always been important.…”

Section: Implications Arising From the Paper About Simulation-based V...mentioning

confidence: 99%

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“Empirical Corporate Finance: Opportunities and Challenges”—Editorial Synthesis of the Special Issue

Sinnadurai

2022

JRFM

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This concept paper synthesises the special issue with an integrated discussion of all four papers published therein, from the viewpoint of the theme of this special issue: opportunities and challenges for future empirical research in corporate finance. The four papers highlight that future empirical research faces the challenge of acknowledging fundamental paradigms in the literature. These include analytical models of capital structure, agency theory, the literature on Initial Public Offering anomalies and earnings valuation. An opportunity for future empirical research is to use these foundations to contribute to emerging paradigms. The latter include the empirical evidence of the shareholder wealth effects of government investment, managerial overinvestment and the acknowledgement of unlisted entities within capital markets research.

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“…Gleißner, 2022; Dorfleitner and Gleißner, 2018; Dorfleitner, 2022). This method specifically allows the derivation of risk-adequate discount rates from a stochastic planning model and is thus based on a risk analysis, which describes uncertain planning premises through probability distributions (“simulation-based valuation”, see Ernst, 2022). Based on Dorfleitner and Gleißner (2018), we assume that two cash flows (trueCF∼1,trueCF∼2) to the valuation object (investment O ) (at the same point in time t ) have the same value ( V ) if they match the expected value E (CFt∼) and in the chosen risk measure R (CFt∼), e.g.…”

Section: A New Approach To Player Valuationmentioning

confidence: 99%

A decision model to value football player investments under uncertainty

Follert,

Gleißner

2024

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PurposeFrom the buying club’s perspective, the transfer of a player can be interpreted as an investment from which the club expects uncertain future benefits. This paper aims to develop a decision-oriented approach for the valuation of football players that could theoretically help clubs determine the subjective value of investing in a player to assess its potential economic advantage.Design/methodology/approachWe build on a semi-investment-theoretical risk-value model and elaborate an approach that can be applied in imperfect markets under uncertainty. Furthermore, we illustrate the valuation process with a numerical example based on fictitious data. Due to this explicitly intended decision support, our approach differs fundamentally from a large part of the literature, which is empirically based and attempts to explain observable figures through various influencing factors.FindingsWe propose a semi-investment-theoretical valuation approach that is based on a two-step model, namely, a first valuation at the club level and a final calculation to determine the decision value for an individual player. In contrast to the previous literature, we do not rely on an econometric framework that attempts to explain observable past variables but rather present a general, forward-looking decision model that can support managers in their investment decisions.Originality/valueThis approach is the first to show managers how to make an economically rational investment decision by determining the maximum payable price. Nevertheless, there is no normative requirement for the decision-maker. The club will obviously have to supplement the calculus with nonfinancial objectives. Overall, our paper can constitute a first step toward decision-oriented player valuation and for theoretical comparison with practical investment decisions in football clubs, which obviously take into account other specific sports team decisions.

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Simulation-Based Business Valuation: Methodical Implementation in the Valuation Practice

Cited by 12 publications

References 27 publications

Identification of Risk Factors in Business Valuation

Identification of Risk Factors in Business Valuation

“Empirical Corporate Finance: Opportunities and Challenges”—Editorial Synthesis of the Special Issue

A decision model to value football player investments under uncertainty

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