You are on page 1of 15

See

discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/254201346

The Discount Rate in Valuing Privately Held


Companies

Article · June 2011


DOI: 10.5791/0882-2875-30.2.70

CITATIONS READS

5 336

2 authors:

Juana Alonso Canadas Alfonso A. Rojo Ramírez


12 PUBLICATIONS 17 CITATIONS Universidad de Almería.
101 PUBLICATIONS 129 CITATIONS
SEE PROFILE

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Minimum rate of return in context View project

Heterogeneity in family firms View project

All content following this page was uploaded by Alfonso A. Rojo Ramírez on 25 January 2014.

The user has requested enhancement of the downloaded file.


Business Valuation Review
Volume 30 N Number 2
’ 2011, American Society of Appraisers

The Discount Rate in Valuing Privately Held Companies


Juana Alonso Cañadas, PhD, and Alfonso A. Rojo Ramirez, PhD

; To value privately held companies, considered as nonquoted companies and thus


with low marketability, two methods can be applied to adjust the business value for
extra risk: (1) reducing the calculated value by the transaction costs or (2) raising the
minimum expected rate of return by investor. The Spanish Accounting and Business
Administration Association suggests use of the second method. This article examines
its proposal in an empirical way, concluding that the discount rate estimated is 2.45%
higher than that calculated by the traditional CAPM model, which implies a drop in
company value of nearly 20%. In other words, the AECA’s proposal can be considered
a valid method for appraisers to calculate the discount rate in the context of valuing
privately held companies.

Introduction where the risk-free rate (i) is the payback from the
One of the main problems in business valuation when investor when he or she invests in treasury debt issued by
we apply the Discounted Cash Flow Model (DCFM) is solvent countries, and the risk premium (P) is the
how to include risk from the uncertainty associated with difference between the average return on capital markets
future cash flows (CFs). It could be done, either in the CF and the risk-free rate and represents the extra return
or in the discount rate (ke). When it is included in the CF, required for investing in risky equity rather than investing
we are dealing with the certainty equivalent method (Cea in risk-free assets. Generally, higher risk commands a
higher premium, and therefore the required return has to
1979) or approach of the expected CF. However, if risk is
be higher.
included in the discount rate, then it is assumed that only
As risk is a relative concept (Holton 2004) associated
one rate exists that must be accepted by investors or
with each investor as a function of the uncertainty of the
shareholders, representing the risk assumed by the
expected CF (Mascareñas 2004), each one has a different
company (Cea 1979). This method is known as ‘‘discount
discount rate, although, statistically, the existence of a
rate method with risk’’ or ‘‘traditional approach.’’
single accepted rate. <
Although the use of the first method is suggested by
Research on the discount rate has been focused on
the IASB 36 (2004) and AECA (1981), nearly all of the
publicly traded companies, with a wide theoretical
research works and professional developments have been framework around them, which considers that the
focused on the latter. investor can diversify their investment and he or she
According to this process, the minimum return required make it liquid through the market. The investors want to
by an owner or investor when investing resources on a achieve a minimum return acting as a Purely Financial
publicly traded firm is the sum of two elements: a risk- Investor (PFI), without risk in a particular company (one
free rate (i) plus a risk premium (P): share) and with the maximum liquidity through the
ke ~izP, ð1Þ market. Thus, a rational PFI diversifies his or her
investment, looking for a portfolio that includes all
securities in proportion to their market participation.
Juana Alonso Cañadas holds a PhD in Financial
However, a ‘‘completely diversified’’ portfolio will not
Economics and Accounting from the Universidad de
eliminate risk entirely. The risk that cannot be eliminated
Almeria. She is a Lecturer in Financial Economics and
Accounting at the University of Almeria. by portfolio diversification is called ‘‘undiversifiable
Alfonso A. Rojo Ramirez holds a PhD in Economic risk’’ or ‘‘systematic risk,’’ since it is the risk that is
Sciences and Business from the Universidad Autón- associated with the market.
oma de Madrid. He is a Professor in Financial So risk premium could be broken down into two risk
Economics and Accounting at the University of factors: a market factor that cannot be eliminated (market
Almeria. risk premium, PM) and another specific factor of the

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:22:49 1 Cust # BVR-D-11-0004


Business Valuation Review

company that can be eliminated by means of diversifi- same nest’’ (Damodaran 2002). In other words, if the
cation (specific risk premium, Pe): market had perfect liquidity and all investors diversify
P~PM zPe : ð2Þ their investments, companies would not focus on a
specific activity, because as financial theory shows, they
According to Bruner et al. (1998), Welch (2000), and would act in an inefficient way.
Graham and Harvey (2001), the most commonly used Because of this nonfinancial behavior of some
method in practice to estimate the risk for an investor is the investors and company owners (economics risk investors
CAPM (Sharpe 1964), where the expected return of a PFI [ERIs]), they fall into a high-risk position and must be
(ke) is the sum of the risk-free rate (i) and the risk premium rewarded with an extra return, as they are assuming a role
(P). P depends on the total market risk and the volatility of that a PFI does not. In particular, this is true in the case of
an asset, but not on the specific risks, because these can be PHC, for which there is no market that gives them
eliminated throughout the investor’s diversification: ‘‘good’’ liquidity (Damodaran 2002).
k ~Rf zbi :ðRM {Rf Þ:
e ð3Þ As a consequence, the CAPM model, even being used
in practice, cannot be appropriate for ERI, as it is
The expression RM 5 Rf is the market risk premium
necessary to find a new approach to estimate the discount
(PM) or systematic risk, and b can be described as a
rate that allows us to include the lack of liquidity and the
measure of responsiveness of the returns on a company’s
risk derived from nondiversification in order to make a
shares compared to the returns on the market as a whole; correct valuation in the case of PHC or, in general, in
that is, the risk that a specific investment adds to a valuing nontraded companies.
diversified portfolio. PM is calculated by using the The aim of this paper is to examine whether the
historical prices of shares of quoted companies and b Spanish AECA’s proposal allows us to solve the discount
by the following expression: rate calculation problem for PHC, including a premium
Cov(i,R M ) due to illiquidity as well as nondiversification. This paper
b~ : ð4Þ
Var(R M ) is organized as follows: the next section reviews previous
literature; the third section lays out the AECA model
This model has been tested empirically concluding the
framework; the following section explains the goal and
existence of a positive linear relationship between an
shows the data, and the last section summarizes the main
asset’s return and beta (Fama and MacBeth 1973).
conclusions.
Nonetheless, it has been criticized recently, for two
reasons in particular: first, the difficulty in obtaining the Literature Review
single risk of a share and, second, the fact that the model Researchers have studied the illiquidity or the lack of
is based on past data to estimate the future capital cost marketability1 from two different fields, which we discuss
(Fernández and Carabias 2007; Gebhart, Lee, and separately.
Swaminathan 1999). Consequently, alternative models
have arisen such as the Arbitrage Pricing Theory (APT) Illiquidity and microstructure of
(Ross 1976), the multifactorial models (Chen, Roll, and financial markets
Ross 1986; Nieto and Rubio 2002), ‘‘proxy’’ models On the one hand, from the point of view of the market
(Fama and French 1992), extended models of CAPM and the CAPM model, investments can be commercialized
(Godfrey and Espinosa 1996; Solnik 1974), models based in a continuous way and to an unlimited amount, although
on accounting data (Beaver, Kettler, and Scholes 1970; it recognizes that investors face liquidity constraints in
Gebhart, Lee, and Swaminathan 1999; Miralles and virtually all financial markets (Longstaff 2001). Previous
Miralles 2002; Moya 1996; O’Hanlon and Steele 2000; studies show that the illiquidity problem makes investors
Rosenberg and Guy 1976), or models based on demand an extra return, which depending on the portfolio
professional opinions (Farrelly, Ferris, and Reichenstein can be approximately 7% to 18%, which is included to
1985; Welch 2000). compensate for the extra risk-premium (Lonsgstaff 2001).
Certainly, the CAPM model works for PFI who have Some researchers try to prove the existence of a FX
the opportunity to diversify their investments through a relation between the market liquidity, measured on the
liquid market, although neither markets are completely
liquid, nor have investors always had the opportunity to 1
For purposes of this article, we will use the terms illiquidity and lack of
diversify their investments, particularly if we are talking marketability as synonyms, although some authors make a distinction. For
about privately held companies (PHCs) whose owners example, Pratt (2001, 00) says ‘‘illiquidity and lack of marketability are
related but distinct. As with all valuation adjustments, it is important to
=
often focus on their business ‘‘putting all its eggs in the identify the base of comparison to which the adjustment relates.’’

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:22:59 2 Cust # BVR-D-11-0004


The Discount Rate in Valuing Privately Held Companies

basis of different variables (e.g., the bid-ask spread, the Figure 1


transaction costs, and the trading activity) and the Models to Estimate DLOM according to
expected return from the investment. The existence of a Empirical Models
positive relation between them has been empirically
demonstrated, explaining that the investor expecting a
higher return on his or her investment when facing
liquidity constraints (Amihud 2002; Amihud and Men-
delson 1986; Brennan and Subrahmanyam 1996; Datar,
Naik, and Radclife 1998; Eleswarapu and Reinganum
1993; Martı́nez et al. 2005; Miralles and Miralles 2006;
Pastor and Stambaug 2003; Rubio and Tapia 1998).
Other authors investigate the seasonal behavior of the
return-illiquidity relation empirically, concluding a strong
seasonal component. This means that the relation between Source: Authors
both is reliably positive only during the month of January
(Eleswarapu and Reinganum 1993; Keim 1983; Reinga- (Sheeler 2004) with an average between 35% and 45%,
num 1983; Roll 1983; Rozeff and Kinney 1976); in the although there is a tendency for it to be reduced over time
same way, studies deal with the causes of illiquidity (Damodaran 2005); (2) the IPO approach finds discounts
(Amihud and Mendelson 1986; Bagehot 1971; Copeland of almost 45% (Emory 1981), as well as ranges that vary
and Galai 1983; Demsetz 1968; Easley et al. 1996) or the between 32% and 55% (Damodaran 2005), depending on
common determinants of illiquidity (Chordia, Roll, and the selected time period; (3) finally, the VM approach
Subrahmanyan 2000; Hasbrouck and Seppi 2001; Huber- finds differences that reach nearly 20% (Koeplin, Sarin,
man and Halka 1999). and Shapiro 2000).

Illiquidity and business valuation B. Other approaches


When we are dealing with company valuation (for a Although previous literature does not recognize any
PFI or for an ERI), illiquidity is faced adjusting the value particular typology to classify these studies, we believe that
by a discount for lack of marketability (DLOM) (Sheeler it would be interesting to open a new group in order to
2004), considering that it implies incapacity to change an incorporate a set of studies that cannot be included under
asset into cash quickly and at a low cost (Bajaj et al. either empirical models or theoretical basis. They calculate
2001; Pratt, Reilly, and Schweihs 2000). Assuming the the DLOM based on numerous factors that could explain it,
existence and the importance of DLOM, as the literature such as the number of potential buyers, preferences of
recognizes, different models are at hand to estimate it, as investors, the price range or spread, the present value of
we summarize in Figure 1. future income that can be received from the sale of assets,
or even the price of restricted marketable assets (Damo-
A. Empirical models daran 2002; Lerch 2008; Sansing 1999; Stockdale 2006).
The most common method to incorporate the DLOM in
business valuation consists of applying estimated dis- C. Theoretical models
counts drawn from prior studies or what is known as To our knowledge, the literature (Lance 2007; Reilly
‘‘benchmarking.’’ Conventionally, there are three differ- and Rotkowski 2007; Tabak 2002) recognizes two types
ent ways to calculate this: (1) one group of studies of theoretical models: those based on financial options
compares the prices of two claims on the same underlying and others on the fundamentals of DCF. Both try to
asset, where one is marketable and the other is not (RSE develop methods for estimating the illiquidity discount
approach); (2) another group of studies compares share objectively and that may be of general application in any
prices of firms before and after an initial public offer (IPO valuation process.
approach); and (3) a third group compares acquisition Some authors (Chaffe 1993; Finnerty 2002; Longstaff
prices of PHC with those of comparable public 1995; Seaman 2005, 2006, 2008, 2009; Trout 2003) estimate
companies, or the valuation multiplier (VM) approach. the discount based on the fundamentals of Option Pricing
Tables 2, 3, and 4 show a summary of the studies Theory under the hypothesis that the acquisition cost of
> under each approach and the estimated average DLOM. financial options is related to it. In general, these alternatives
According to empirical research, we can conclude that to estimate DLOM have two problems: (1) assigning an
(1) the RSE approach shows a high variability range asset’s volatility of a nonquoted company and (2) the

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:22:59 3 Cust # BVR-D-11-0004


Business Valuation Review

Table 1
Studies about Illiquidity in Financial Markets

Goal Results Studies


Analyzing Return-Illiquidity Relation Positive relation; so, higher illiquidity, Amihud 2002
higher returns. Amihud and Mendelson 1986
Brennan and Subrahmanyan 1996
Datar, Naik, and Radcliffe 1998
Martı́nez et al. 2005
Miralles and Miralles 2006
Pastor and Stambaugh 2003
The Seasonal Behavior of the The relation between illiquidity and Eleswarapu and Reinganum 1993
Return-Illiquidity Relation return is reliably positive only Keim 1983
during the month of January. Reinganum 1983
Roll 1983
Rozeff and Kinney 1976
Causes of Illiquidity Adverse selection costs Amihud and Mendelson 1986
Transaction costs Bagehot 1971
Copeland and Galai 1983
Demsetz 1968
Easly et al. 1996
Common Determinants of Liquidity Inventory risks Chordia, Roll, and Subrahmanyan 2000
Asymmetric information Hasbrouck and Seppi 2001
Huberman and Halka 1999

Source: Authors.
Note: This table shows a classification of relevant studies about market illiquidity according to the main goal of the various works. Four
groups exist: the first analyzes the relation between two variables: return and illiquidity; the second, the seasonal behavior of that
relation; the third, possible causes of illiquidity; and the fourth, the common determinants of liquidity.

holding period. Previous studies indicate that the values of business valuation by DCFM that includes, inter alia,
DLOM range between 20% and 50% (Hood, Mylan, and nondiversifiable risk and the effect of lack of liquidity.
O’Sullivan 1997; Kania 2001) in spite of the findings of The discount rate is based on aggregation of the risk-
Kania (2000), who points out that neither appraisers nor free rate (i) plus two premiums: one for market risk (PM)
researchers have made any definitive conclusions. and the other to reflect a specific business risk (Pe):
On the other hand, three authors have chosen the
ke min ~izPM zPe : ð5Þ
theoretical foundations underlying in the DCF model in
order to include the illiquidity discount. First, Tabak The idea underlying expression 5 is that an ERI who
(2002) suggests a model based on the CAPM and the invests his or her resources in a PHC requires a higher
equity risk premium. Second, Mercer (2003) designs the risk than a PFI who operates in the financial market,
Quantitative Marketability Discount Model (QMDM) to according to the degree of diversification and liquidity.
employ the basic discounted cash flow model to value Therefore, an ERI will demand at least a minimum return
illiquid interests of PHC in the context of appraisals of the such as the PFI plus a premium Pe (AECA 2005, 38)
relevant business companies. Finally, we can find the whose estimation, under AECA proposal, requires that it
proposal of AECA (2005) that suggests an alternative starts from the premise that economic and financial risk of
discount rate instead of CAPM to value PHC by DCF, the company is reflected in its profitability (Penman
which is explained and tested in the following sections. 2007, 693). Taking this hypothesis as a starting point, Pe
AECA’s Discount Rate could be calculated by the following expression:
si
AECA2 (2005) issued a standard about PHC valuation Pe ~u:PM ~ (RM {i), ð6Þ
sM
that suggests a discount rate (ke) for owner-investors that
could be extended to nonpublicly traded companies. This where
standard proposes a discount rate that should be used in u is the coefficient of variability of returns or total beta (bT)
si is the standard deviation of financial profitability of the
2
The Spanish Accounting and Business Administration Association is a
privately independent standard setter in accounting, finance, and manage-
company after interest and taxes
ment (http://aeca.es/queesaecaingles.htm). sM is the standard deviation of market return.

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:00 4 Cust # BVR-D-11-0004


The Discount Rate in Valuing Privately Held Companies

Table 2 Table 4
Summary of RSE Studies Summary of VM Studies ?
Years Average Empirical Study Years Covered Average DLOM (%)
Empirical Study Covered Transactions DLOM (%)
Koeplin, Sarin, and
SEC* 1966–1969 398 25.8 Shapiro 2000 1984–1998 22.28–53.85
SEC{ 1966–1969 338 32.6 Block 2007 1984–2006 16.25–27.10
Gelman 1972 1968–1970 89 33.0
Trout 2003 1968–1972 60 33.5 Source: Authors.
Moroney 1973 1969–1972 146 35.6 Note: The third group of studies attempts to estimate the
Maher 1976 1969–1973 — 35.4 DLOM comparing acquisition prices for public and private
SRC 1978–1982 28 45.0{ companies; that is, for each private company is identified the
WMA 1981–1984 33 31.2{ acquisition of a public one in the same country are identified.
Silber 1991 1981–1988 69 33.8 We show the main authors who have used that approach. The
FMV Opinions 1979–1992 100 23.0 table is composed of the period covered and the range of
FMV Opinions 1980–1997 243 22.1 variation for the DLOM.
Management
Planning 1980–1996 53 27.1
Wruck 1989 1979–1985 — 17.5 Thus, expression 7 would be an alternative discount
Hertzel and rate valid for including, inter alia, the effect of illiquidity
Smith 1993 1980–1987 106 13.5
Johnson 1999 1991–1995 72 200 and nondiversification on the business value:
Bajaj et al. 2001 1990–1995 88 22.2 ke ~izPM zPe ~iz(RM {i)zu:(RM {i)
Columbia Financial ð7Þ
Advisors 1996–1997 23 21.0 ~iz(RM {i):(1zu):
LiquiStat 2005–2006 61 32.8
The theoretical approach of this discount rate is
Source: Authors, based on Pratt, Reilly and Schweihs (2000). consistent with the foundations of the CAPM and the
Note: One body of empirical evidence has analyzed the DLOM existence of nondiversification and an illiquidity pre-
under the RSE approach. We present a list of the studies
mium. As Rojo, Cruz, and Alonso (2011) have
indicating for each one: the period covered, the number of
transactions tested, and the estimated DLOM expressed in demonstrated, the ERI could be considered as he or she
percent. The lower DLOM is calculated by Johnson (1999), and has a mixed portfolio composed of a benchmark market
the highest is estimated by SRC, but we can observe an average index whose profitability is RM and a risky asset that
of nearly 30%. yields Re financed by debt at risk-free interest rate Rf.
* Including reporting OTC companies.
{ Including no reporting OTC companies.
Therefore, the total return (ke) obtained by an ERI is the
{ Median discounts. sum of the returns of two investments: an index market
portfolio and the risk portfolio minus the cost of its debt
portfolio:
se
ke ~RM zRe {Rf ~RM z(RM {Rf ) : ð8Þ
sM
Table 3 As RM 5 Rf + PM, equation 8 can be rewritten as follows:
Summary of IPO Studies si
ke ~Rf zPM zPM , ð9Þ
sM
Years Average
Empirical Study Covered DLOM (%) where the specific premium (Pe) is the term PM?(si/sM).
Emory 1980–2000 45.0 This article considers that the AECA proposal
Valuation Advisors 1999–2001 40.0 contributes to avoiding subjective posterior discounts,
Willamette Management associated in most cases with the process of negotiation.
Associates 1975–1995 51.6 This is also a direct way of valuing the company that is
Source: Authors. not quoted, taking into account its particular risk.
Note: Some authors and institutions estimate the DLOM under Note that this discount rate requires empirical support
the IPO approach, quantifying the discount by comparing post- to justify its use in practice. Rojo and Alonso (2006) have
IPO share prices with transaction prices in the same shares explored how the company value changes in replacing the
before the IPO. This table shows a selection of these, indicating
which study; the period covered and the estimated DLOM are discount rate of the CAPM with the AECA in the DFC
expressed in percent. This study has been developed for several model. Using a sample of ninety-four Spanish public
periods, the percent shown in the table being an average of all. companies they conclude that the business value

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:00 5 Cust # BVR-D-11-0004


Business Valuation Review

decreases around 20%. However, since the AECA’s To calculate the value in sample A, the DCFM method
discount rate is designed for PHC, it is necessary to test it has been applied as in expression 9 (see appendix 1):
in this kind of company. Xn
FLTPj VEn
VE0 ~ j
z n, ð9Þ
Testing AECA’s Discount Rate in PHC j~1 (1zke )
(1zk e)

Objective and data where


The aim of this section is to apply the AECA’s
VE0 is the business value for owners
discount rate to a dataset of PHC to analyze whether the
FLTP is the shareholder’s free cash flow for period j (1, 2,
company drop in value is in accordance with the DLOM
…, n)
applied in business valuation. Particularly, we expect a
VEn is the terminal shareholder value at the end of the
lower value ranging from 20% to 60% as shown in the
forecast period under the perpetuity model without
previous literature. DLOM is defined as follows:
growth rate4
VECAPM {VEAECA ke is the discount rate.
DLOM~ , ð8Þ
VECAPM
In the case of sample B we have to apply the Gordon
where model, which considers that the only CFs demanded by
VECAPM is the business value from applying the CAPM investors are dividends (DIVs) that grow at a stable rate
discount rate (g), under the assumption that g is less than ke. As this
VEAECA is the business value from applying the AECA condition is not satisfied in our data sample, finally we
discount rate. use expression 11. Note that to calculate the discount rate,
we apply both CAPM and AECA models, following the
Additionally, we check if the estimated DLOM varies same procedure explained above (see appendix 2), with
depending on the liquidity level. It is reasonable to think the only difference being that information is available
that the highest discount should be in companies that, at about market beta for listed companies:
least apparently, are less liquid, e.g., companies that are
DIV
not listed on a stock exchange or PHC that do not take VEo ~ , ð10Þ
ke {g
part in the financial markets. So less liquid investments
are riskiest, and, therefore, investors will demand higher DIV
returns. If the discount rate is calculated using a model VEo ~ : ð11Þ
ke
that incorporates a specific premium for the additional
After estimating the company value and the DLOM, as
risk, the resulting value of the company will be lower
defined by expression 8, we analyzed the results based on
than if the premium is not included in it.
descriptive and inferential statistics. Table 5 summarizes
Regarding the data, we select two types of companies
the main statistics for both samples. It shows that, in
for the period 2000 to 2007: first, businesses sorted as samples A and B, the discount rate is higher if we use the
PHC (sample A, with 286 subjects) were obtained from AECA model rather than the CAPM, and, consequently,
the SABI database; second, companies listed on the we observe a decrease in the value of the company of
Spanish index financial market (sample B, with ninety-six 49.26% for PHC and 27.63% for public companies.
subjects) were obtained from the website of the Spanish
Although it is clear that VEAECA should be less than
Securities Market Commission (CNMV).3 To analyze the VECAPM, due to the discount rate, we must be sure that
behavior of DLOM by liquidity level, the companies of these results are not random. Therefore, data have been
sample B were classified into two categories: liquid firms, analyzed using nonparametric tests (Wilcoxon signed-rank
if they are listed in the most liquid Spanish stock test) to conclude that the differences between both values
exchange (IBEX35), and illiquid firms, if they are not. are statistically significant, as we summarize in Table 6.
Data processing Regarding our additional objective, Table 7 shows the
main results for each group of companies in which
The procedure to estimate the business value for PHC sample B is classified by level of liquidity. It can be
is different from that of a public company given the concluded that the DLOM for liquid companies (25.08%)
information available for each individual entity. is less than for illiquid companies (32.13%), as we
expected.
3
The CNMV is the agency in charge of supervising and inspecting the
Spanish stock markets and the activities of all the participants in those
4
markets. As is suggested by Copeland, Koller, and Murrin (2000).

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:01 6 Cust # BVR-D-11-0004


The Discount Rate in Valuing Privately Held Companies

Table 5
Statistical Results

Sample Variable Mean Median Variance Standard Deviation


Panel A .keAECA 0.1406 0.1056 0.1031 0.0106
.keCAPM 0.1060 0.0709 0.1031 0.0106
.VEAECA 1,484,817.10 497,440.70 2.53E+06 6.40E+12
.VECAPM 2,821,487.62 817,359.68 5.11E+06 2.61E+13
.DIF Value (J) 1,508,328.75 452,479.92 2.51E+06 6.28E+12
.DLOM 0.4926 0.4400 0.5397 0.2913
Panel B .keAECA 0.0955 0.0911 0.0152 0.0002
.keCAPM 0.0658 0.0648 0.0078 0.0001
.VEAECA 5.8506E+08 9.4859E+07 1.2880E+09 1.6588E+18
.VECAPM 7.6876E+08 1.4324E+08 1.5675E+09 2.4571E+18
.DIF Value (J)) 1.8370E+08 4.4513E+07 3.3114E+08 1.0965E+17
.DLOM 0.2763 0.2950 0.1105 0.0122

Source: Authors.
Note: Summary statistics to show the values of the discount rates calculated by AECA and CAPM model (keAECA and keCAPM) and
company value derived from applying the rates in expression 9 (VEAECA and VECAPM). Also shown is the difference between both,
expressed in euros and in percent. For each variable, the mean, median, variance, and standard deviation are shown.

A comparison is then made of the DLOM obtained estimate ke is the CAPM. However, when we value PHC,
with samples A and B, considering that companies from we need an alternative method since there is a specific
panel A are companies less liquid than those from panel risk associated with venture capitalists (ERI) that is not
B, given that PHC are less liquid investments than the considered by CAPM. Therefore, an alternative method
public companies, which have the financial market to to estimate the discount rate for valuing PHC that
provide liquidity. Under this assumption, the DLOM includes the lack of marketability in particular is required.
observed in sample A should be higher than the one in This research tests whether the proposal of AECA
sample B. provides an efficient model for valuators when faced with
After overcoming the constraints for estimating the estimating the discount rate to use for company valuation
company value in both samples using different valuation when applying the DCFM.
methods, the results obtained show that the DLOM in Our results, after applying the AECA model in two
sample A is nearly 21% higher than that of sample B. different sets of companies, permit us to conclude that as
This means the DLOM is greater for PHC, inter alia, ke by CAPM is lower than ke by AECA, the company
because they do not have a financial market that provides value drops when we use the latter. The main component
liquidity. of the reduction is the DLOM, which varies between 20%
and 50% depending on the sample and the level of
Conclusion
liquidity. This decrease in value is a direct consequence
One of the most debated questions in company of an increase of the discount rate that includes a specific
valuation is that of the discount rate in the DCF model. risk premium that primarily provides for an investment’s
When we value public companies, although there are lack of marketability. For this reason it can confidently be
different opinions about this, in general, the model to stated that the decline in value can be assimilated with the
DLOM.
Table 6
Summary of Statistical Significance
Table 7
Sample Variables Significance Summary of Main Results by Liquidity Level
Panel A .keCAPM {keAECA .Yes
Variable Sample B Mean Median
.VECAPM 2 VEAECA .Yes
Panel B .keCAPM {keAECA .Yes DLOM .Illiquid Company 0.3213 0.3212
.VECAPM 2 VEAECA .Yes .Liquid Company 0.2508 0.2057

Source: Authors. Source: Authors.


Note: The main results of applying nonparametric tests to Note: Main results for the analysis of DLOM by liquidity level
check the statistical significance between distribution variables. based on panel B.

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:01 7 Cust # BVR-D-11-0004


Business Valuation Review

In conclusion, we suggest that the AECA’s discount Chaffee, David B. H., III. 1993. ‘‘Option Pricing as a
rate is an efficient model for valuing PHC when Proxy for Discount for Lack of Marketability in Private
practitioners need to take into account specific factors Company Valuations.’’ Business Valuation Review
of risk. In particular, it offers a tool for avoiding possible (December):182–188. B
inconveniences derived from estimation of DLOM by Chen, Nai-Fu, Richard Roll, and Stephen Ross. 1986.
benchmark. ‘‘Economic Forces and the Stock Market.’’ Journal of
Business 59:383–404.
References Chordia, Tarun, Richard Roll, and Avanidhar Subrah-
AECA. 1981. ‘‘Proposal Methodology’’ (Propuesta de manyan. 2000. ‘‘Commonality in Liquidity.’’ Journal
una metodologı́a). Document no. 1 about business of Financial Economics 56:3–28.
valuation by AECA, March. Copeland, Thomas E., and Dan Galai. 1983. ‘‘Informa-
AECA. 2005. ‘‘Privately Held Companies Valuation’’ tion Effects on the Bid-Ask Spread.’’ Journal of
(Valoración de pymes). Document no. 7 about business Finance 38:1457–1469.
valuation by AECA, June. Copeland, Tom, Tim Koller, and Jack Murrin. 2000.
Amihud, Yakov. 2002. ‘‘Illiquidity and Stock Returns: Valuation: Measuring and Managing the Value of
Cross-Section And Time-Series Effects.’’ Journal of Companies. New York: John Wiley & Sons.
Financial Markets 5:223–249. Damodaran, Aswath. 2002. Investment Valuation. 2nd ed.
Amihud, Yakov, and Haim Mendelson. 1986. ‘‘Asset New York: John Wiley & Sons.
Pricing and the Bid-Ask Spread.’’ Journal of Financial Damodaran, Aswath. 2005. ‘‘Marketability and Value:
Economics 17:223–249. Measuring the Illiquidity Discounts.’’ Working Paper.
Bagehot, Walter. 1971. ‘‘The Only Game in Town.’’ New York University.
Financial Analysts Journal 27:12–14. Datar, Vinay T., Narayan Y. Naik, and Robbert Radcliffe.
Bajaj, Mukesh, David J. Denis, Stephen F. Ferris, and 1998. ‘‘Liquidity and Stock Returns: An Alternative
Atulya Sarin. 2001. ‘‘Fair Firm Value and Marketabil- Test.’’ Journal of Financial Markets 1:203–219.
ity Discounts.’’ Journal of Corporation Law 27: Demsetz, Harold. 1968. ‘‘The Cost of Transacting.’’
89–115. Quarterly Journal of Economics 82:33–53.
Banz, Rolf W. 1981. ‘‘The Relationship between Return Easley, David, and Maureen O’Hara. 2004. ‘‘Information
and Market Value of Common Stock.’’ Journal of and the Cost of Capital.’’ Journal of Finance
@ Financial Economics 9:3–18. 59:1553–1583. C
Beaver, William, Paul Kettler, and Myron Scholes. 1970. Easley, David, Nicholas M. Kiefer, Maureen O’Hara, and
‘‘The Association between Market Determined and Joseph B. Pperman. 1996. ‘‘Liquidity Information and FO
Accounting Determined Risk Measures.’’ Accounting Less-Frequently Traded Stocks.’’ Journal of Finance
Review 45:654–682. 51:1405–1436.
Block, Stanley. 2007. ‘‘The Liquidity Discount in Eleswarapu, Venkat R., and Marc R. Reinganum. 1993. ‘‘The
Valuing Privately Owned Companies.’’ Journal of Seasonal Behaviour of the Liquidity Premium in Asset
Applied Finance 17:33–40. Pricing.’’ Journal of Financial Economics 34:373–386.
Brennan, Michael J., and Avadnihar Subrahmanyan. Emory, John D. 1981. ‘‘A Professional Appraiser’s
1996. ‘‘Market Microstructure and Asset Pricing: On Approach to Fair Market Valuation of Closely-Held
the Compensation for Illiquidity in Stock Returns.’’ Securities.’’ Estate Planning 8:228–232.
Journal of Financial Economics 41:441–464. Fama, Eugene F., and Kenneth R. French. 1992. ‘‘The
Brier, Kenneth P., and Joseph B. Darby. 1995. ‘‘Family Cross-Section of Expected Return.’’ Journal of Fi-
Limited Partnerships: Decanting Family Investment nance 47:427–466.
A Assets into New Bottles.’’ Tax Lawyers 49:127–164. Fama, Eugene F., and James D. MacBeth. 1973. ‘‘Risk
Bruner, Robert F., Kenneth M. Eades, Robert S. Harris, Return and Equilibrium: An Empirical Test.’’ Journal
and Robert C. Higgins. 1998. ‘‘Best Practices in of Political Economy 38:607–636.
Estimating the Cost of Capital: Survey and Synthesis.’’ Farrelly, Gail E., Kenneth R. Ferris, and William M.
Financial Practice and Education (Spring/Sum- Reichenstein. 1985. ‘‘Perceived Risk, Market Risk, and
mer):13–16. Accounting Determined Risk Measures.’’ Accounting
Cea, Jose Luis. 1979. Modelos de comportamiento de la Review 60:654–682.
gran empresa. Madrid, Spain: Instituto de Planifica- Fernández, Pablo, and Jose M. Carabias. 2007. ‘‘The
ción Contable, Ministerio de Hacienda. Danger of Using Calculated Betas’’ (El peligro de

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:02 8 Cust # BVR-D-11-0004


The Discount Rate in Valuing Privately Held Companies

utilizar betas calculadas), March 3. At http://ssrn.com/ Lance, Travis R. 2007. ‘‘The Use of Theoretical Models
EX abstract5897700. to Estimate the Discount for Lack of Marketability.’’
Finnerty, John D. 2003. ‘‘The Impact of Transfer Willamette Management Insights, (Autumn), at http://
Restrictions on Stock Price.’’ ASA Working Paper. www.willamette.com/insights, accessed July 24, 2008.
Gebhart, William R., Charles M. C. Lee, and Bala Swamin- Lerch, Mary A. 2008. ‘‘Quantification of Marketability
athan. 1999. ‘‘Toward an Implied Cost of Capital.’’ Discounts Using Regression.’’ Valuation Strategies
October 27. Parker Center for Investment Research 11:28–35.
EO Working Paper. At http://ssrn.com/abstract5254523. Longstaff, Francis A. 1995. ‘‘How Much Can Market-
Gelman, Milton. 1972. ‘‘An Economist-Financial Ana- ability Affect Security Values?’’ Journal of Finance
lyst’s Approach to Valuing Stock of a Closely Held 50:1767–1774.
Company.’’ Journal of Taxation (June):353–354. Longstaff, Francis A. 2001. ‘‘Optimal Portfolio Choice
Godfrey, Stephen, and Ramón Espinosa. 1996. ‘‘A and the Valuation of Illiquid Securities.’’ Review of
Practical Approach to Calculating Cost of Equity for Financial Studies 14:407–431.
Investment in Emerging Markets.’’ Journal of Applied Maher, Michael J. 1976. ‘‘Discounts for Lack of
Corporate Finance 9:80–89. Marketability for Closely Held Business Interests.’’
Gordon, Myron J. 1962. The Investment Financing and Taxes 54:562–571.
EP Valuation of Corporation. Chicago: Richard D. Irwin. Martı́nez, Miguel A., Belén Nieto, Gonzalo Rubio, and
Graham, John R., and Campbell R. Harvey. 2001. ‘‘The Mikel Tapia. 2005. ‘‘Asset Pricing and Systematic
Theory and Practice of Corporate Finance: Evidence Liquidity Risk: An Empirical Investigation of the
from the Yield.’’ Journal of Financial Economics Spanish Stock Market.’’ International Review of
60:187–243. Economics and Finance 14:81–103.
Hasbrouck, Joel, and Duane J. Seppi. 2001. ‘‘Common Mascareñas, Juan. 2004. El riesgo en la empresa. Tipologı́a,
Factors in Prices, Order Flows, and Liquidity.’’ análisis y valoración. Madrid, Spain: Pirámide.
Journal of Financial Economics 59:383–411. Mercer, Christopher Z. 2003. ‘‘A Primer on the
Hertzel, Michael, and Richard L. Smith. 1993. ‘‘Market Quantitative Marketability Discount Model.’’ CPA
Discounts and Shareholder Gains for Placing Equity Journal 73:66–68.
Privately.’’ Journal of Finance 48:459–485. Miralles, José L., and Marı́a M. Miralles. 2002. ‘‘Factores
Holton, Glyn A. 2004. ‘‘Defining Risk.’’ Financial determinantes del valor bursátil de las empresas
Analysts Journal 60:19–25. portuguesas (1991–1999). Nuevas propuestas metodo-
Hood, Edwin T., John J. Mylan, and Timothy P. lógicas.’’ Revista Española de Financiación y Con-
O’Sullivan. 1997. ‘‘Valuation of Closely Held Busi- tabilidad 31:495–528.
EQ ness Interests.’’ UMKC Law Review 65:399–482. Miralles, José L., and Marı́a M. Miralles. 2006. ‘‘The Role
Huberman, Gur, and Dominika Halka. 1999. ‘‘Systematic of an Illiquidity Risk Factor in Asset Pricing: Empirical
Liquidity.’’ Journal of Financial Research. At http:// Evidence from the Spanish Stock Market.’’ Quarterly
ER ssrn.com/abstract5255116. Review of Economics and Finance 46:254–267.
IASB 36. 2004. ‘‘Impairment of Assets, European Moroney, Robert E. 1973. ‘‘Most Courts Overvalue
Regulation.’’ Commission Rule no. 2236/2004. Closely-Held Stocks.’’ Taxes, (March):144–156.
Johnson, Bruce A. 1999. ‘‘Quantitative Support for Moya, Ismael. 1996. ‘‘Valoración analógico-bursátil de
Discounts for Lack of Marketability.’’ Business empresas. Aplicación a las Cajas de ahorro.’’ Revista
Valuation Review 16:152–155. Española de Financiación y Contabilidad 25:199–234.
Kania, John J. 2000. ‘‘The Current Status of Adding a Nieto, Belén, and Gonzalo Rubio. 2002. ‘‘El modelo de
Small Firm Risk Premium to the Valuation Discount valoración con cartera de mercado: una nueva
Rate.’’ Business Valuation Review 19:136–141. especificación del coeficiente beta.’’ Revista Española
Kania, John J. 2001. ‘‘Evolution of the Discount for Lack de Financiación y Contabilidad 31:697–723.
of Marketability.’’ Business Valuation Review 20:7–14. O’Hanlon, John, and Anthony Steele. 2000. ‘‘Estimating
Keim, Donald B. 1983. ‘‘Size-Related Anomalies and the equity risk premium using accounting fundamen-
Stock Return Seasonality.’’ Journal of Financial tals.’’ Journal of Business, Finance and Accounting
Economics 12:13–32. 27:1051–1084.
Koeplin, Jonh, Atuluya Sarin, and Alan C. Shapiro. 2000. Pallian, Ralph. 2005. ‘‘Estimating the Cost of Capital:
‘‘The Private Company Discounts.’’ Journal of Considerations for Small Business.’’ Journal of Risk
Applied Corporate Finance 12:94–104. Finance 6:334–340.

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:02 9 Cust # BVR-D-11-0004


Business Valuation Review

Pastor, Lubos, and Robert F. Stambaugh. 2003. ‘‘Liquid- Rubio, Gonzalo, and Mikel Tapia. 1998. ‘‘Liquidez y
ity Risk and Expected Stock Returns.’’ Journal of Valoración de activos.’’ Temas de Actualidad
Political Economy 111:642–685. 70:30–33.
Penman, Stephen H. 2007. Financial Statement Analysis Sansing, Richard C. 1999. ‘‘Economic Foundations of
and Security Valuation. 3rd ed. New York: McGraw- Valuation Discounts.’’ Journal of the American
Hill. Taxation Association 21:28–38.
Pratt, Shannon P. 2001. Business Valuation Discounts Seaman, Ronald M. 2005. ‘‘Minimum Marketability
and Premiums. New York: John Wiley & Sons. Discounts 2nd Edition.’’ Business Valuation Review
Pratt, Shannon P., Robert F. Reilly, and Robert P. 24:58–65.
Schweihs. 2000. Valuing a Business: The Analysis and Seaman, Ronald M. 2006. ‘‘A Minimum Marketability
Appraisal of Closely Held Companies. 4th ed. New Discount.’’ Business Valuation Review 24:177–180.
York: McGraw–Hill. Seaman, Ronald M. 2008. ‘‘Minimum Marketability
Reilly, Robert F., and Aaron Rotkowski. 2007. ‘‘The Discounts 3rd Edition.’’ Business Valuation Review
Discount for Lack of Marketability: Update on Current 27:18–22.
Studies and Analysis of Current Controversies.’’ Tax Seaman, Ronald M. 2009. ‘‘Minimum Marketability
Lawyer 61:241–287. Discounts 4th Edition.’’ Working Paper. At http://
Reinganum, Marc R. 1983. ‘‘The Anomalous Stock www.dlom-info.com/pdf/Full_Report_2008_Study.pdf,
Market Behaviour of Small Firms in January: Empir- accessed March 17, 2009.
ical Test for Tax-Loss Selling.’’ Journal of Financial Sharpe, William F. 1964. ‘‘Capital Assets Prices: A
Economics 12:89–104. Theory of Market Equilibrium under Conditions of
Rojo, Alfonso A. 2007. Valoración de empresas y gestión Risk.’’ Journal of Finance 19:425–442.
ES basada en valor. Madrid, Spain: Paraninfo. Sheeler, Carl L. 2004. ‘‘Empirical Support for Illiquidity
Rojo, Alfonso A., and Juana Alonso. 2006. ‘‘La prima de Discount Levels: Is It Time for a New Road Map?’’
riesgo en la valoración de Pymes.’’ In XII Encuentro de Valuation Strategies 8:26–47.
AECA. Cordoba, Spain. Silber, William I. 1991. ‘‘Discounts on Restricted Stock:
Rojo, Alfonso A., Juana Alonso, and Rute Abreu. 2008. The Impact of Illiquidity on Stock Prices.’’ Financial
Socially Responsible Investment: The Discount Rate in Analysts Journal 47:60–64.
SMEs. Estudos e Documentos de Trabalho. Instituto Solnik, Bruno H. 1974. ‘‘An equilibrium Model of the
ET Politécnico da Guarda. International Capital Market.’’ Journal of Economic
Rojo, Alfonso A., Salvador Cruz, and Juana Alonso. Theory 8:500–525.
2011. ‘‘A Note on the Operating Return of a Company Stockdale, John J. 2006. ‘‘Time Is of the Essence: A
Under Modigliani-Miller Assumptions. April 21. At Proposed Model for Computing the Discount for Lack
EU http://ssrn.com/abstract51825821. of Marketability.’’ Business Valuation Review
Roll, Richard. 1983. ‘‘Was ist das? The Turn of the Year (Fall):108–113.
Effect and the Return Premia of Small Firms.’’ Journal Tabak, David. 2002. ‘‘A CAPM-Based Approach to
of Portfolio Management 11:18–28. Calculating Illiquidity Discounts.’’ NERA Economic
Rosenberg, Barr, and James Guy. 1976. ‘‘Prediction of Consulting Working Paper.
Beta from Investment Fundamentals.’’ Financial Trout, Robert R. 2003. ‘‘Minimum Marketability Dis-
Analysts Journal 32:60–72. counts.’’ Business Valuation Review 22:124–127.
Ross, Stephen A. 1976. ‘‘The Arbitrage Theory of Welch, Ivo. 2000. ‘‘Views of Financial Economists on
Capital Asset Pricing.’’ Journal of Economic Theory the Equity Premium and on Professional Controver-
3:341–360. sies.’’ Journal of Business 73:501–524.
Rozeff, Michael S., and William Kinney. 1976. ‘‘Capital Wruck, Karen H. 1989. ‘‘Equity Ownership Concentra-
Market Seasonality. The Case of Stock Returns.’’ tion and Firm Value: Evidence from Private Equity
Journal of Portfolio Management 9:18–28. Financings.’’ Journal of Financial Economics 23:3–28.

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:03 10 Cust # BVR-D-11-0004


The Discount Rate in Valuing Privately Held Companies

Appendix 1
Table A1
Business Value Estimation for Sample A

Variable Expressions Components Calculus and Comments EV


FLTP FLTP~FLTE+FLTD RBEdT is EBITDA after tax RBEdT is calculated as:
st
V(CC) Exp is the variation of RBEdT 5 EBITDA 2 TAX +
~RBEdT {V ðCC Þst
Exp
working capital without taking AhT(GF) 2 AhT(SC)
into account the cash where:
{IEF +FLTD IEF is the economic investment EBITDA is earnings before interest,
in fixed assets taxes, depreciation, and
FLTD is the free cash flow for amortization
debt holders TAX are taxes
GF are debt interests
SC are capital grants
AhT is the tax savings (loss)
st
V(CC) Exp is calculated as inventory
plus receivables minus payables
IEF is calculated as tangible and
intangibles assets minus grants
plus tax savings derived from
capital grants
FLTD is calculated as aggregate long-
and short-term financial debt
minus interest expenses net of tax
effect
VEn FLTPnz1 FLTPn+1 is the shareholders’ free
VEn ~ cash flows in the period j
ke (1, 2, 3, …)
ke is the discount rate
ke(CAPM) keCAPM ~izb:ðRM {i Þ I is the risk-free rate Since we are working with private
RM is the Spanish stock market companies that do not have a
return market beta, it has been replaced
b is the market beta (b < bT) by total beta, as suggested by
Damodaran (2002)
bT se se is the standard deviation of Financial profitability after interest
bT ~
sM financial profitability of the and taxes is calculated by the EW
company after interest and taxes expression RBEdIT/RP
sM is the standard deviation Note that RBEdIT is the EBITDA
of market return after interest and taxes
ke(AECA) si : I is the risk-free rate
ke ~izðRM {i Þz ðRM {i Þ RM is the Spanish stock market return
sM
si is the standard deviation of financial
profitability of the company after
interest and taxes
sM is the standard deviation of market
return

Source: Authors.

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:03 11 Cust # BVR-D-11-0004


Business Valuation Review

Appendix 2
Table A2
Business Value Estimation for Sample B

Variable Expressions Components of Expression


DIV .Mean of dividends for period 2000 to 2007
ke(CAPM) .keCAPM ~izb:(RM {i) I is the risk-free rate
RM is the Spanish stock market return
b is the market beta
ke(AECA) si : i is the risk-free rate
.ke ~iz( R M {i)z ( R M {i)
sM RM is the Spanish stock market return
si is the standard deviation of financial
profitability of the company after interest
and taxes
sM is the standard deviation of market return

Source: Authors.

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:03 12 Cust # BVR-D-11-0004


The Discount Rate in Valuing Privately Held Companies

Authors Queries
Journal: Business Valuation Review
Paper: bvrv-30-02-01
Title: The Discount Rate in Valuing Privately Held Companies

Dear Author
During the preparation of your manuscript for publication, the questions listed below have arisen. Please attend
to these matters and return this form with your proof. Many thanks for your assistance

Query Query Remarks


Reference

1 Author: This article has been lightly


edited for grammar, style, and
usage. Please compare it with your
original document and make any
corrections on these pages. Please
limit your corrections to substantive
changes that affect meaning. If no
change is required in response to a
question, please write ‘‘OK as set’’
in the margin. Copy editor

2 AU: Please check if end of para-


graph beginning ‘‘As risk is a…’’ is
complete grammatically. CE

3 AU: Please give page of quotation.


CE

3 AU: Please give page of quotation.


CE

4 AU: Please mention table 1 in the


text. CE

5 AU: Check syntax of phrase after


the semicolon in the Table 4 Note, it
needs clarification and subject-verb
agreement is not correct. CE

6 AU: Reference Banz 1981 is not


cited; please cite or delete. CE

7 AU: Reference Brier and Darby


1995 not cited; please cite or
delete. CE

8 AU: Please check author names in


Chaffee 1993 reference; there ap-
pears to be a surname missing. CE

Business Valuation Review — Summer 2011 Page 0

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:03 13 Cust # BVR-D-11-0004


Business Valuation Review

9 AU: Reference Demsetz 1968 not


cited; please cite or delete. CE

10 AU: Please give date website ac-


cessed in Fernández and Carabias
2007. CE

11 AU: Please give date website ac-


cessed in Gebhart et al. 1999. CE

12 AU: Reference Gordon 1962 not


cited; please cite or delete. CE

13 AU: Please check authors’ names


in Hood et al. 1997; there appears
to be a surname missing. CE

14 AU: Please give date website ac-


cessed in Gur and Halka 1999. CE

15 AU: Reference Rojo 2007 not cited;


please cite or delete. CE

16 AU: Reference Rojo et al. 2008 not


cited; please cite or delete. CE

17 AU: Please give date website ac-


cessed in Rojo et al. 2011. CE

18 AU: Appendix Table 1 variables


were italicized for consistency,
Please verify the table and equa-
tions are correct. PR

19 AU: In Appendix Tables 1 and 2,


should ke(CAPM) and ke(AECA) have
parentheses in column 1, or should
they be removed as in column 2?
PR

20 AU: Should ‘‘Lonsgstaff 2001’’ be


‘‘Longstaff 2001’’? Please check
PR

21 AU: Is ‘‘Pperman’’ correct in Easley


1968 reference? PR

Page 0 ’ 2011, American Society of Appraisers

Business Valuation Review bvrv-30-02-01.3d 7/9/11 14:23:04 14 Cust # BVR-D-11-0004

View publication stats