Valuation of Equity Securities, Private Firms, and Startups


Volume 16 Issue 1 2020


Syed Babar Ali
Barret Hodgson University.

Manzoor A. Khalidi
Barret Hodgson University.

Abstract For valuation of equity securities and similar objects research has not been rigorous and holistic. This paper is an attempt to review the literature on the valuation of equity for a variety of types of entities and within some important valuation contexts. The review was performed for such themes as (1) Valuation of Stocks (2) Valuation of Private Firms (3) Valuation of Startups (4) Valuation in Emerging Markets (5) Valuation and IPO. The review found that there is a consensus over various models for their usefulness and theoretical soundness, at the same time researchers and practitioners are seeking better models, particularly in the areas of private firm valuation and startups. The valuation of stock has a more robust and recognized framework as compared to private firms and startups. The valuation of private firms is more complex because of closed nature of the firm. The valuation of a startup is complicated because of the newness of the business and industry, and also because of the nature of the business structure. In general, the practices involving the valuation of equity securities and other similar entities have evolved and improved over time. This research will enable the security analysts and other valuation experts to gain insights into various models and their inputs for their beneficial applications.
Keywords Valuation of Securities, Valuation of Private firms, Valuation emerging markets, Valuation of startups, and Valuation and IPO.
Year 2020
Volume 16
Issue 1
Type Research paper, manuscript, article
Recognized by Higher Education Commission of Pakistan, HEC
Category "Y"
Journal Name IBT Journal of Business Studies
Publisher Name ILMA University
Jel Classification D63, D21, D22, D53, F36, G32
ISSN no (E, Electronic) 2409-6520
ISSN no (P, Print) 2416-8393
Country Pakistan
City Karachi
Institution Type University
Journal Type Open Access
Type of Review Double Blind Peer Reviewed
Format PDF
Paper Link
Page 125-140
References Aggarwal, R., Bhagat, S., & Rangan, S. (2009). The Impact of Fundamentals on IPO Valuation. Financial Management, 38(2), 253-284.

Armstrong, C., Davila, A., & Foster, G. (2006). Venture-backed Private Equity Valuation and Financial Statement Information. Review of Accounting Studies, 17, 119–154.

Bancel, F., & Mittoo, U. R. (2014). The Gap between Theory and Practice of Corporate Valuation: The Survey of European Experts. The Journal of Applied Corporate Finance, 26(4), 106-117.

Bekaert, G., Erb, C. B., & Harvey, C. R. (1997). What Matters for Emerging Equity Market Investments. Emering Markets Quarterly, 1(2), 17-46.

Bonaventura, M., & Giudici, G. (2017). IPO Valuation and Profitability Expectations: Evidence from the Italian Exchange. Eurasian Bus Rev, 7, 247-266.

Bouncken, R. B., & Gast, J. (2015). Coopetition: A Systematic Review, Synthesis, and Future Research Directions. Review of Management Science, 9(3), 577- 601.

Bradshaw, M. T. (2004). How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations? The Accounting Review, 79(1), 25-50.

Brennan, M. J., & Schwartz, E. S. (1984). Optimal Financial Policy and Firm Valuation. The Journal of Finance , 34(3), 593-607.

Brotherson, W. T., Eades, K. M., Harris, R. S., & Higgins, R. C. (2013). “Best Practices” in Estimating the Cost of Capital: An Update. Journal of Applied Finance, 23(1), 15-33.

Bruner, R. F., Conroy, R. M., Estrada, J., Kritzman, M., & Li, W. (2002). Introduction to Valuation in Emerging Markets. Emerging Markets Review, 3, 310–324.

Canefield, D., Kruschwitz, L., & Loffler, A. (2014). Why Total Beta Produces Arbitrary Valuations: A Violation of the “No-Arbitrage” Principle. Business Valuation Review, 33(4), 131-135.

Cassia, L., Plati, A., & Vismara, S. (2007). Equity Valuation Using DCF: A Theoretical Analysis of the Long-term Hypotheses. Investment Management and Financial Innovations, 4(1), 91-107.

Certo, S. T., Daily, C. M., & Dan, D. R. (2003). Signaling firm value through board structure: An investigation of initial public offerings. Entrepreneurship Theory and Practice, 26(2), 33–50.

Cogliati, G. M., Paleari, S., & Vismara, S. (2011). IPO pricing: Growth Rates Implied in Offer Prices. Annals of Finance, 7, 53-82.

Damodaran, A. (2008). Equity Risk Premiums (ERP): Determinants, Estimation and Implications. New York University Working Paper.

Damodaran, A. (2009). Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges. New York University Working paper.

Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of any Asset (3rd ed.). Hoboken, New Jersey, USA: John Wiley & Sons.

Darrough, M., & Ye, J. (2007). Valuation of loss firms in a knowledge-based economy. Rev Acc Stud, 12, 61-93.

Dechow, P. M., & You, H. (2013). Understanding and Predicting Target Price Valuation Errors. UC Berkley Working Paper.

Deeds, D. L., Decarlois, D., & Coombs, J. E. (1997). The Impact of Firm-Specific Capabilities on the Amount of Capital Raised in an Initial Public Offering- Evidence from the Biotechnology Industry. Journal of Business Venturing, 12, 31-46.

Demirakos, E. G., Strong, N. C., & Walker, M. (2004). What Valuation Models Do Analysts Use? Accounting Horizons, 18(4), 221-240.

Demirakos, E. G., Strong, N. C., & Walker, M. (2010). Does Valuation Model Choice Affect Target Price Accuracy? European Accounting Review, 19(1), 35-72.

Dittmann, I., Maug, E., & Kemper , J. (2004). How fundamental are fundamental values? Valuation methods and their impact on the performance of German venture capitalists. European Financial Management, 10, 609-639.

Dohmeyer, B., & Butler, P. (2013, September). The Implied Private Company Pricing Line 2.0 K0 = (FCFF1 / P) + g. Buiness Valuation Update, 19(9).

Fazzini, M. (2018). Business Valuation: Theory and Practice. Palgrave Macmillan.

Feldman, S. J. (2005). Principles of Private Firm Valuation. Hoboken, New Jersey: John Wiley and Sons, Inc.

Ge, D., Mahoney, J. M., & Mahoney, J. T. (2005). New Venture Valuation by Venture Capitalists: An Integrative Approach. Working Papers from University of Illinois at Urbana-Champaign, College of Business.

Goodman, D. H., & McLelland, M. (2016). The Implied Private Company Pricing Line (IPCPL): On the Nature, Scope, and Assumptions of IPCPL Theory. Business Valuation Review, 35(1), 18-29.

Green, J., Hand, J. R., & Zhang, X. F. (2016). Errors and Questionable Judgments in Analysts’ DCF. Review of Accounting Studies, 21, 596-632.

Hand, J. R. (2005). The Value Relevance of Financial Statements in the Venture Capital. The Accounting Review, 80(2), 613-648.

Hitchner, J. R. (2017). Financial Valuation Applications and Models (Fourth ed.). Hoboken, New Jersey, USA: John Wiley and Sons.

How, J., Lam b, J., & Yeo, J. (2007). The Use of the Comparable Firm Approach in Valuing Australian IPOs. International Review of Financial Analysis, 16, 99-115.

Imam, S., Barker, R., & Clubb, C. (2008). The Use of Valuation Models by Uk Investment Analysts. European Accounting Review, 17(3), 503-535.

Jerald, P. E., Robinson, T. R., & Stowe, J. D. (2015). Equity Valuation: A Survey of Professional Practice. CFA Institute Working Paper.

Kazlauskienė, V., & Christauskas, Č. (2008). Business Valuation Model Based on the Analysis of Business Value Drivers. Engineering Economics, 57(2), 23-31.

Kim, M., & Ritter, J. R. (1999). Valuing IPOs. Journal of Financial Economics, 53, 409-437.

Köhn, A. (2018). The Determinants of Startup Valuation in the Venture Capital Context: A Systematic Review and Avenues for Future Research. Management Review, 68, 3-36.

Kolouchová, P., & Novák, J. (2010). Cost of Equity Estimation Techniques Used by Valuation Experts. IES Working Paper.

Lee, P. M. (2001). What’s in a Name.Com?: The Effects of ‘.Com’ Name Changes On Stock Prices and Trading Activity. Strategic Management Journal, 22, 793- 804.

Lerner, J., Sørensen, M., & Strömberg, P. (2008). Private Equity and Long-run Investment: The Case of Innovation. Working Paper 14623.

Mcallister, P. (1995). Valuation Accuracy: A Contribution to the Debate. Journal of Property Research, 12(3), 203-216.

Milanesi, G., Pesce, G., & El Alabi, E. (2013). Technology-Based Startup Valuation Using Real Options with Edgeworth Expansion. Journal of Finance and Accounting, 1(2), 54-61.

Miloud, T., Aspelund, A., & Cabrol, M. (2012). Startup Valuation by Venture Capitalists: An Empirical Study. An International Journal of Entrepreneurial Finance, 4(2), 151-174.

Montalván, S. M., & Sarrió, D. R. (2006). The Discount Rates in Emerging Capital Markets. The IUP Journal of Financial Economics, 0(2), 35-55.

Nasser, S. (2010). Valuation for Startups: 9 Methods Explained. Retrieved from Medium: methods-explained-53771c86590e.

Penman, S. (2016). Valuation: The State of the Art. Schmalenbach Business Review, 17(1), 3–23.

Pereiro, L. E. (2006). The practice of investment Valuation in Emerging Markets: Evidence from Argentina. Journal of Multinational Financial Management, 16(2), 10-183.

Rath, Raymond, D. (2010). Private Company Valuation. In J. E. Pinto, E. Henry, T. R. Robinson, & J. D. Stowe, Equity Asset Valuation: CFA Institute Investment Series (pp. 631-686). Hoboken, New Jersey, USA: John Wiley & Sons Inc.

Rousseau, D. M., & Mccarthy, S. (2007). Educating Managers from an Evidence- based Perspective. Academy of Management Learning & Education, 6(1), 84- 101.

Saleh, W. (2017). Empirical estimation of the Residual Income Valuation Model: Profit-Making vs Loss-Making Firms. Journal of Finance and Bank Management, 5(2), 14-31.

Sanchez, J. G., Preve, L., & Allende, V. S. (2010). Valuation in Emerging Markets: A Simulation Approach. Journal of Applied Corporate Finance, 22(2), 100-108.

Sievers, S., Mokwa, C. F., & Keienburg, G. (2013). The Relevance of Financial Vs Non-Financial Information for the Valuation of Venture Capital-Backed Firms. European Accounting Review, 22(3), 467-511.

Sahoo, S., & Rajib, P. (2013). Comparable Firm’s P/E Multiple and IPO Valuation: An Empirical Investigation for Indian IPOs. Decision, 40(2), 27-46.

Trugman, G. R. (2017). Understanding Business Valuation: A Practical Guide to Valuing Small and Medium Sized Businessesn (Fifth ed.). New York: New York, American Institute of Certified Public Accountants, Inc.

Welch, I., & Ritter, J. (2002). A Review of IPO Activty, Pricing and Allocations. Yale ICF Working Paper.