Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes

Marc J. R. Broekema, Niek Strohmaier, Jan A. A. Adriaanse and Jean-Pierre I. van der Rest

Journal of Behavioral Finance, 2022, vol. 23, issue 1, 23-42

Abstract: Business valuations of the same company made by different valuators frequently diverge, resulting in lengthy and costly disputes. This paper takes a novel approach in explaining inconsistencies in business valuations by adopting a psychological perspective and offering a first investigation into the role of cognitive biases in valuations. In two experimental studies (N = 331) we show that valuators can be affected by both anchoring bias and engagement bias (i.e., being affected by a client’s interests). These findings cast doubt on the notion of fair value and demonstrate the importance of recognizing the psychology of business valuations. Our contribution is timely considering the current COVID-19 pandemic and its aftermath in which accurate valuations will be paramount, but also extremely complex due to the high degree of uncertainty in the economy and underlying industries.

Date: 2022
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DOI: 10.1080/15427560.2020.1821687

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