The Economics of Business Valuation: Towards a Value Functional Approach

The Economics of Business Valuation: Towards a Value Functional Approach

The Economics of Business Valuation: Towards a Value Functional Approach

The Economics of Business Valuation: Towards a Value Functional Approach

Synopsis

For decades, the market, asset, and income approaches to business valuation have taken center stage in the assessment of the firm. This book brings to light an expanded valuation toolkit, consisting of nine well-defined valuation principles hailing from the fields of economics, finance, accounting, taxation, and management. It ultimately argues that the "value functional" approach to business valuation avoids most of the shortcomings of its competitors, and more correctly matches the actual motivations and information set held by stakeholders.

Much of what we know about corporate finance and mathematical finance derives from a narrow subset of firms: publicly traded corporations. The value functional approach can be readily applied to both large firms and companies that do not issue publicly traded stocks and bonds, cannot borrow without constraints, and often rely upon entrepreneurs to both finance and manage their operations. With historical side notes from an international set of sources and real-world exemplars that run throughout the text, this book is a future-facing resource for scholars in economics and finance, as well as the academically minded valuation practitioner.

Excerpt

The Poorly Understood Concept of a Business

Despite the enormous literature on corporate finance, accounting, economics, management, and mathematics, two fundamental principles of business remain poorly understood: the definition of the firm and the determination of its value.

Without grasping the purpose of the firm—or naively assuming that it exists to “maximize profits” in some ill-defined way—one cannot understand how a business has market value, or how managers operate it in the face of uncertainty. Furthermore—especially given the daunting statistics on the failure rate of newly formed companies—we cannot hope to understand why an entrepreneur would start one!

Filling the Gap: The Definition of the Firm

This book attempts to fill the yawning gap between the extant theories of business and business value and the reality faced by business managers, investors, and entrepreneurs. To do so, it starts from a fundamental question: What is a firm?

Unfortunately, we have little in the way of an answer! As will be demonstrated, various working definitions must be abandoned once they are confronted with facts.

To fill this gap, I propose a new definition of the firm that allows for a rigorous distinction between a business and the many other entities that have businesslike attributes. This same definition also distinguishes a business from a portfolio of securities. A portfolio is an essential concept in mathematical finance but not a plausible substitute for a firm. Only after properly defining the firm does the book move forward to methods of estimating the value of a firm.

Filling the Gap: The Value of a Firm

Many readers will be familiar with the three traditional business valuation methods, commonly known as the market, asset, and income methods. Each of these has an obvious . . .

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