Volume 5, Issue 1

Security breaches may be a normal risk of doing business, or they may result in economic losses and changes in business valuation. A small number of studies outside the finance literature find mixed results regarding the economic impact of security breaches. In this paper, we examine a large sample to determine whether breaches result in significant economic losses and whether the announcement venue has an impact on business valuation. We find a negative and significant impact on firm value when the breach is announced in one of four major news outlets. When the announcement is elsewhere, the impact is minimal.

Correctly applying the valuation methodologies is important. Sabal (2007), using a well-designed example, shows that various methods give identical results, and asserts that APV is more convenient for the emerging market. However, a few issues are questionable which we intend to clarify, including (1) the evidence regarding target debt ratio; (2) the relationship between the WACC/APV and the capital structure; (3) the inconsistencies in the CCF application; and (4) why using the framework by Fernández (2004) does not necessarily prove Sabal's assertion. Our study and Sabal's work are both integral parts in contributing to the better understanding of business valuation.

This research examines the comparative impact of market concentration and excess capacity on the performance of posted-offer experimental markets. We report the results of panel data analysis of 35 markets with or without excess capacity involving two, three, or four sellers. We find that sellers can sustain higher prices in more concentrated laboratory markets. Higher levels of excess capacity lead to lower laboratory market prices supporting the notion that excess capacity reduces the ability of firms to collude as opposed to the view that excess capacity is a trigger strategy punishment that sustains collusion.

Risk-adjusted valuation is well established in both theory and business practice. However, its implications are not always immediately apparent or intuitive in legal disputes such as breach of contract lawsuits. In particular, damages are often calculated by discounting the differences in cash flows between but-for (no breach) and actual (breach) worlds by a single discount rate. While widely used, this approach can produce incorrect valuation results. This paper provides a case study of a breach of an electricity tolling agreement to illustrate the more general valuation principle of discounting but-for and actual cash flows using two discount rates.

This study investigates a valuation adjustment, known as the discount for lack of marketability (DLOM) for private firms. By matching private company transactions with publicly traded counterparts, we find discounts that average 65-70% and exceed 80% in some sectors of the economy. Our discounts are significantly larger than the DLOM findings estimated from restricted stock, IPO, and acquisition studies. Larger companies, those with positive net income, and firms with lower risk of financial distress exhibit lower DLOMs. Our findings put into question the sizes of discounts typically applied in valuation engagements for privately-held companies.

The effect of tax on the value of a company does not present too much difficulty as long as the company is profitable and ungeared (i.e., without debt). In case of leverage, the tax effect is quantified under the notion of tax shield, which is widely discussed in the literature. The case of not-yet-profitable companies is generally treated as a simple extension in most textbooks. This article shows that the calculation of the tax value for these companies needs special consideration, especially if the company is to reach profitability only with a certain probability. Unlike the case of profitable companies, the value diminishing effect of taxes for start-ups is much stronger than the tax rate itself. The article also takes a look at the effect of diversification within a company. Until now, diversification has generally been regarded as a pure risk aspect that might be rewarded with a lower cost of capital. This article exhibits how diversification has a direct effect on value by improving the tax value.

After a brief overview of different company valuation theories, this paper presents the main functions (decision, arbitration, and argument or negotiation function) of company valuation according to the functional (i.e., purpose-oriented) theory. The main body of the paper focuses on the decision function and shows how the decision value can be derived as a subjective limit value that different economic agents assign to the company. Finally, the differences between the functional and the market value oriented theory of company valuation are discussed.

In the discounted cash flow model, free cash flow can be viewed as composed of four components: (i) after-tax sales revenue minus cash operating expense, minus (ii) increase in working capital, minus (iii) capital expenditures, plus (iv) tax savings from depreciation. It is unproblematic (although perhaps unimaginative) to forecast the first two components as constant proportions of sales revenue. The same does not hold for the last two components. Due to the long life of property, plant, and equipment (PPE), capital expenditures and tax savings from depreciation, which are derived from net PPE and depreciation, depend not only on the current revenue level, but also on the company's past growth history. Naive forecasting of net PPE and depreciation (meaning, in particular, that net PPE is a constant proportion of sales revenue) can noticeably bias the valuation result when the company expects rapid real growth in the initial explicit forecast period years, but only moderate (or no) real growth in the post-horizon period. This paper shows how net PPE and depreciation can be forecasted in an approximate fashion without explicit knowledge of the company's plans for capital expenditures. A stylized example is used throughout, in particular for demonstrating the effect of naive forecasting.