The ‘big market delusion’ overvalues companies at first

BVWireIssue #209-3
February 19, 2020

industry analysis
early stage valuations, forecast, multiple, industry analysis, cannabis

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. That’s the thesis of a new paper by Bradford Cornell (Anderson Graduate School of Management, UCLA) and Aswath Damodaran (New York University—Stern School of Business). They illustrate using three case studies of industries that have or are going through this phenomenon: dot-com retail, online advertising, and the cannabis market. The authors say that the lesson for valuation professionals is that “pricing based upon multiples and the peer group can lead to significant overpricing.” To avoid this, in-depth valuations, “flawed though they might be, can prove to be the first step in recognizing the big market delusion, and perhaps correcting for it.” The paper is titled “The Big Market Delusion: Valuation and Investment Implications” and is available from the Social Science Research Network (SSRN).
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