Academic journal article Journal of Financial Management & Analysis

Evaluation of Valuation Methodologies in Developed and Developing Countries

Academic journal article Journal of Financial Management & Analysis

Evaluation of Valuation Methodologies in Developed and Developing Countries

Article excerpt


The concept of valuation has always been an enigma, even for the most financially sophisticated manager. Despite its intricate aura. a review of business periodicals would suggest that valuation methodology is of continual interest to shareholders, managers and other stakeholders of the corporation. The concept of value creation has been integrated into current theories of strategic management leading many companies to adopt the search for value as their new holy grail. As noted by Normann and Ramirez,

strategy is the art of creating value... increasingly successful companies do not just add value the reinvent it.1

One of the most complex aspects of the valuation exercise is the development of a valuation model that precisely captures all of the elements affecting value. In developed countries such as the U. S. A., Canada and the OECD nations of Western Europe, this task is commonplace, as there are commonly accepted metrics, for not only measuring, but also monitoring changes in value. The goal of the corporation is expected to be the maximization of shareholder value and if the management of the corporation fails to achieve this objective, pressure will be exerted on the corporation from a variety of sources. The corporation that does not maximize value will ultimately be subject to competitive threats and possibly hostile takeovers, along with the demands of activist shareholders and board directors.

In developing countries, however, the topic of valuation methodology is perhaps more controversial. Managers and corporations in these countries are very reluctant to accept the maximazation of shareholder value as their primary driver and, hence, do not fully recognize the importance of valuation models based solely on this tenet. This fundamental difference in valuation philosophy has become an increasingly problematic issue in recent years due to the globalization of the world economy and the resulting mobilization of capital. Developed and developing countries increasingly engage in a wide range of financial transactions such as joint ventures, mergers and acquisitions. Within the confines of these activities. the application of appropriate valuation models is required.

Copeland, Koller and Murrin contend that the North American approach of shareholder value maximization, accompanied with broad ownership of debt and equity and an oper market for corporate control, is closely related with a higher standard of living, greater overall productivity and competitiveness. and a better functioning equity market. They further conclude,

if countries whose economic systems are not based on maximizing shareholder value give investors lower returns on capital than those who do, they will slowly be starved for capital. as capital markets continue to globalize, falling farther and farther behind in global competition. A value-based system becomes ever more important as capital becomes ever more mobile.2

LeBaron observes that the convergence of world markets has led some financial managers to contend that a universal valuation model is emerging, which will draw on the investment disciplines common to each area of the globe ... the emerging valuation model will have three components: assets, control and currency and investors will use the model to process quite systematically what they should be doing.3

This Paper provides an anthology of valuation methodologies employed in developed and developing countries with a particular emphasis on identifying the primary differentiating features between the two approaches, from the perspective of developing countries with particular reference to the substantial contributions made by Professor Swamy.4

Valuation Methodologies in Developed Countires

* Accounting Approach vs. Discounted Cash Flow Analysis: In the developed countries there are many prescribed techniques for measuring corporate or asset performance and these various measurements reflect two major theoretical approaches to valuation: the accounting approach and the discounted cash flow (DCF) approach. …

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