A new paper finds that company-specific inflation rates assumed for the steady state are lower than the expected general inflation rates. This should not be the case regularly or on average, respectively, the authors argue. They examined 263 valuation reports for Germany-listed firms with a valuation date between 2000 and 2021, mostly for the purpose of determining the price per share to compensate minority shareholders during a squeeze-out. The results of the analysis are from a time when expected inflation was much lower than recently. “Inflation-induced value effects will increase, if a company’s specific inflation rate is not adjusted to higher expectations about future inflation,” the authors write. They also point out that a company-specific inflation rate can fluctuate based on differing inflation expectations in the markets in which the company is operating. “This challenges the usual assumption that the company specific inflation rate is constant, thereby also challenging the use of the perpetuity formula after a detailed cash flow forecast for a few years.”

The paper is “Inflation and Valuation Practice: German Evidence” by Andreas Schüler and Sebastian Wünsche and is available if you click here. The paper is published in the Schmalenbach Journal of Business Research.