BVWire attended the ASA 2020 International Appraisers Conference held online October 12-13, and it was about as close as you could get to the experience of actually being on-site. The platform (vFairs) had a great “look” to it and was very easy to use and hook up with colleagues. From a virtual lobby, you could head into the session rooms or wander into the exhibit hall or the networking lounge. The sessions were excellent as well. Here are just a few takeaways of note:
- New PAPM model builds on CAPM. In an interesting session, Roger G. Ibbotson (Yale, Zebra Capital Management) presented the popularity asset pricing model (PAPM), which builds on CAPM. The PAPM model assumes that equity prices are established for many reasons and that any attribute that makes a stock “more popular” makes it more desirable, which reduces its future expected returns. Ibbotson co-wrote a monograph on this, which you can read if you click here.
- Watch out for the ‘big market delusion.’ The allure of a big market for an emerging business is hard to resist and causes “irrational exuberance” that initially overprices companies and triggers an inevitable correction, according to Bradford Cornell (UCLA). The lesson for valuation professionals is that pricing based on multiples and the peer group can lead to significant overpricing. Cornell co-wrote a paper on this with Aswath Damodaran (New York University—Stern School of Business), which you can access if you click here.
- Rethink your long-term growth rate assumptions. Are you using a long-term growth rate based on real GDP growth plus inflation? The trouble is, GDP includes both existing firms and new firms, whose growth is driven by acquisition. The expected long-term growth rate in the terminal value should reflect organic growth, so the effect of the acquisitions should be backed out. That’s what new research by Roger Grabowski (Duff & Phelps) and Ashok Abbott (West Virginia University) has done, and they also reveal that all industries do not grow at the same rate. They have a paper in the works but wanted to share their important findings with the ASA audience.
- Research underway on impact of voting rights on value. The experts at Houlihan Lokey are conducting new research into discounts or premiums for voting rights. In their session, the firm’s John Taylor and Yuka Itami went over the findings to date, which appear to indicate that a discount for lack of voting rights may not exist in the marketplace. A member of the IRS was in the audience and commented that he regularly sees a 3%-to-5% discount in taxpayer appraisals for small nonvoting interests. But, based on the new research, should there be no discount applied if, say, a company was valued using a GPC methodology? While the researchers did not see the need to apply a discount or premium in the particular cases they examined, they noted that each case is different and the decision would be dependent on the specific facts and circumstances.
- FASB deliberating on goodwill project. An important but controversial project by the FASB concerns how to account for certain identifiable intangible assets acquired in a business combination. The FASB is looking at whether annual goodwill impairment tests should be eliminated for public companies and whether to subsume other assets into goodwill (see our last coverage here). Joy Sy, a supervising project manager at the FASB, reported that the board will continue to deliberate on varying approaches into 2021 and is monitoring a project on the same topic launched by the International Accounting Standards Board. She also noted that, while the scope of the project focuses on public entities, the FASB board will also look at whether or not a new model would make sense for all entities.
More coverage of the ASA event will be in the December 2020 issue of Business Valuation Update. Next year’s conference is scheduled to be held in Las Vegas Oct. 25-26, 2021.
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