Business Valuation Inspired by the Austrian School

Olbrich Michael (), Quill Tobias () and J. Rapp David ()
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Olbrich Michael: Institute of Auditing, Saarland University, Campus, B4 1, 2nd Floor, Room 2.30, D-66123 Saarbrücken, Germany
Quill Tobias: Institute of Auditing, Saarland University, Campus, B4 1, 2nd Floor, Room 2.30, D-66123 Saarbrücken, Germany
J. Rapp David: Institute of Auditing, Saarland University, Campus, B4 1, 2nd Floor, Room 2.30, D-66123 Saarbrücken, Germany

Journal of Business Valuation and Economic Loss Analysis, 2015, vol. 10, issue 1, 1-43

Abstract: The significant failure rates observed in mergers and acquisitions (M&A) indicate structural deficiencies in business transactions. This paper identifies serious weaknesses in common valuation methods that play a key role in poor transaction practice. Common valuation methods are in particular discounted cash flow (DCF) methods. DCF methods are usually based on neo-classical theories that assume the existence of a perfect and complete capital market. As will be demonstrated, the underlying theoretical patchwork is contradictory and lacks utility. Therefore, utilizing DCF methods to value a business and deduce economic decisions from such a valuation is decision-making built on sand. Following a normative-deductive methodology, this paper seeks an alternative theoretical concept to build a business valuation theory on solid ground. Such an alternative is found in the Austrian School of thought. The resulting valuation concept, subjective business valuation theory, is based on the theory of marginal utility proposed by Gossen, which was rediscovered and refined by the scholars of the early Austrian School. Contrary to highly restrictive neo-classical valuation, subjective business valuation approaches reality and is therefore well-suited for practical implementation.

Keywords: capital asset pricing model (CAPM); decision-making; discounted cash flow (DCF); future earnings method (FEM); marginal utility; mergers and acquisitions (M&A) (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/jbvela-2014-0001

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