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BVU News and Trends February 2021

A monthly roundup of key developments of interest to business valuation experts.

New Research Paper Joins Call to ‘Let Go’ of the Size Premium

A look at the latest paper that joins mounting academic research over the recent past that shows that the size effect no longer exists—or was never there in the first place.

BVU News and Trends January 2021

A monthly roundup of key developments of interest to business valuation experts.

The Size Effect: Should We Care?

I read the entire edition of Business Valuation Review (Volume 37, Issue 3, Fall 2018) focused on ‘‘the size effect.’’ I have the following ‘‘big picture’’ comments after considering all four articles together and title my letter: The Size Effect: Should We Care?

Vanguard stock market forecast implies a U.S. ERP of 3% to 5%

Annual returns of U.S. stocks over the next decade are forecasted to be in the “modest 3.7%-5.7% range,” according to a recent market outlook report from Vanguard.

BVU News and Trends December 2020

A monthly roundup of key developments of interest to business valuation experts.

D&P reduces recommended U.S. ERP to 5.5%

Duff & Phelps has decreased its recommended U.S. equity risk premium (ERP) from 6.0% to 5.5% for use as of Dec. 9, 2020, according to a client alert.

Side Effect of COVID-19: Beta Changes Impacting Business Valuations

The COVID-19 pandemic is causing betas and other measures of risk commonly used in company valuations to appear to have changed. Beta is a critical component used by valuation experts when determining the discount rate in business valuation. Even small changes in betas can cause large changes in the discount rate and, consequently, can cause large changes in valuation. In this panel discussion, Dr. Roper and Cliff Ang, CFA, will describe how the COVID-19 pandemic ...

D&P enhances infographic on cost of capital

Duff & Phelps has updated its infographic, “Cost of Capital in the Current Environment,” and has enhanced it with new data on the eurozone.

The Absence of a Size Effect: Letting Go Of The Size Premium

Many valuation practitioners believe that there is a size effect and add a size premium to their CAPM cost of equity. In this talk, Cliff Ang will demonstrate why the underlying premise behind the size effect no longer holds and discuss the academic literature and empirical evidence on the absence of a size effect. He then dives into the related issue, which is why valuation practitioners should let go of the size premium.

BVU News and Trends November 2020

A monthly roundup of key developments of interest to business valuation experts.

BVU News and Trends October 2020

A monthly roundup of key developments of interest to business valuation experts.

‘The “Normalized” Risk-Free Rate: Fiction or Science Fiction?’

That’s the title of a new paper from Pablo Fernandez, a professor in the department of financial management at the University of Navarra—IESE Business School in Spain.

Article says the size effect didn’t vanish—it never existed

The hits keep coming to the existence of the size effect.

BVU News and Trends September 2020

A monthly roundup of key developments of interest to business valuation experts.

Global BVU News and Trends September 2020

Business valuation news from a global perspective.

Latest paper in the size-effect debate

Some appraisers believe that the size effect has diminished or disappeared since it was first documented in 1981.

Global BV News: New module added to Duff & Phelps Cost of Capital Navigator

A new international industry benchmarking module will be available in late October for the Duff & Phelps Cost of Capital Navigator.

D&P offers infographic on cost of capital amid COVID-19

Which financial market and economic indicators did Duff & Phelps take into consideration when it arrives at its recommended U.S. equity risk premium and accompanying normalized risk-free rate?

The Market Price of Risk: Quantifying a COVID-19 Equity Risk Premium Using High-Yield Bond Pricing

The authors demonstrate how a high-yield option-adjusted spread is used when doing appraisals of private companies while considering the market volatility and economic slowdown caused by the COVID-19 pandemic.

D&P lowers U.S. normalized risk-free rate to 2.5%

Duff & Phelps has decreased its recommended U.S. normalized risk-free rate from 3.0% to 2.5% for use as of June 30, 2020, according to a client alert.

Using a size premium could trigger Daubert trouble, says new article

Adding a size premium to the cost of equity could make an expert’s testimony subject to a Daubert challenge, says Clifford Ang (Compass Lexicon) in a recent article.

More concern about the validity of the size premium factor

Most business valuers consider a size premium when calculating cost of capital for financial reporting purposes.

New business valuation resource from Professor Fernandez captures low market returns

Pablo Fernandez continues to release research that may assist UK business valuers working on reports with valuation dates in Q1 2020.

Alternate Valuation Methods in the Era of COVID-19

COVID-19 has substantially affected the financial and economic characteristics of privately held and publicly traded businesses throughout the U.S. In this presentation, the presenters will address the valuation impact of COVID-19 and the potential distortions that can occur when traditional valuation approaches and methods are mechanically applied. In the current environment, it is important for analysts to think “outside-the-box” when performing business valuations with valuation dates occurring during the first and second quarter of 2020.

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