 Valuing Financial Service FirmsAswath Damodaran ()
Journal of Financial Perspectives, 2013, vol. 1, issue 1, 59-74 Abstract: Valuing banks, insurance companies and investment banks has always been difficult, but the rolling market crises of the last few years has elevated the concern to the top of the list of valuation issues. The problems with valuing financial service firm stem from two key characteristics. The first is that the cash flows to a financial service firm cannot be easily estimated, since many of the ingredients needed are not clearly defined. The second is that most financial service firms operate under a regulatory framework that governs how they are capitalized, where they invest and how fast they can grow. Changes in the regulatory environment can create large shifts in value. In this paper, we confront both factors. We develop a simple model to value banks and us it to extract the two key numbers that drive the value of a bank. The first is the cost of equity, which will be a function of the risk that emanates from the firm’s investments, and second is the return on equity, which is determined both by the company’s investment choices as well as regulatory restrictions. Keywords: banks; valuation; financial service firms (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ris:jofipe:0001 Access Statistics for this article Journal of Financial Perspectives is currently edited by Ms Alina Stefan More articles in Journal of Financial Perspectives from EY Global FS Institute 1 More London Place, London SE1 2AF, UK. |
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