Do Valuation Multiples Reflect a Size Effect?

Cornell Bradford () and Gokhale Rajiv ()
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Cornell Bradford: California Institute of Technology, Pasadena, CA91125, USA
Gokhale Rajiv: Compass Lexecon, Chicago, IL60604, USA

Journal of Business Valuation and Economic Loss Analysis, 2018, vol. 13, issue 1, 26

Abstract: In this paper, we empirically examine whether there is evidence to support the hypothesis that a size premium is impounded in valuation multiples. Overall, we find essentially no evidence to support the hypothesis. One interpretation of this finding is that there is no size effect in current U.S. data. If that is true, then size premiums should not be added to the discount rate and there is no potential inconsistency with the market multiples approach. However, if an appraiser chooses to add a size premium to the discount rate based on historical return data such as that reported by Ibbotson, it raises the possibility the DCF value indicator will be inconsistent with the value indicator based on market multiples. Given the fact that virtually all corporate appraisals include both a DCF and a market multiples analysis our work suggests that the two approaches should be blended with care in situations where a size premium is contemplated.

Keywords: valuation; size effect; multiple analysis (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/jbvela-2015-0013

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