Applying modern asset pricing theory to valuation of intangibles

In a presentation entitled Intangible Asset Valuation, Malcolm McLelland, PhD, begins with the premise that “there is no reliable way to estimate fair market-derived, risk-adjusted rates of return for non-traded assets and liabilities.” McLelland cogently argues for employing a combination of arbitrage and risk-neutral asset pricing theories to value intangibles.

“…using modern asset pricing theory and econometric analysis results in clear, transparent valuations with supportable-and-supported assumptions … critical in transaction advisory services, financial reporting, and auditing.”

McLelland looked at inspection reports from the Public Company Accounting Oversight Board, the PCAOB, and extracted write-ups from four top-tier auditors. Each used similar language: the auditor “failed to obtain evidence supporting the valuation conclusions …” The author argues commonly used valuation methods often rely on unsupported assumptions and professional judgment, and, in contrast, “modern asset pricing theory” results in valuations of intangibles that are transparent and supportable.