A Short Note on the Valuation of Asset Management Firms

Abstract

Market capitalization relative to assets under management is an often used valuation metric for asset management firms. While the dividend discount model suggested by HUBERMAN (2004) implies that cross-sectional variations in this measure are explained by cross-sectional differences in operating margins, we do not find this in our data set. Instead, we show that a much preferred model – inspired by the work of BERK/GREEN (2004) – would also include the level of fees as an explanatory variable. This dramatically increases the fit of our relative valuation model and casts some doubt on the validity of the “HUBERMAN puzzle”.