Firm valuation in Brazil: evidence of overvaluation in the valuation reports

Abstract

Under the Agency theoretical framework, information asymmetry is crucial in stakeholders’ conflicts. This problem may be present in the process of firm valuation. This work aims to analyze the determinants of the added value of firm financial experts’ valuations, i.e., the difference between disclosed firm value in the valuation report and firm market value. The study assesses the effect of ownership concentration, firm size, the costs of preparing the valuation report, and stock liquidity estimating a set of econometric models. The sample is composed of all firm valuation reports undertaken in Brazil between 2002 and 2012 with data hand collected from CVM (The Brazilian SEC) website and Economatica database. The results indicate that ownership concentration is directly related to the added value of financial experts’ valuations, indicating a possible problem of information asymmetry that benefits controlling shareholders who may be interested in higher firm valuation. The findings also indicate that firm size, higher cost of the firm valuation process, and firm market liquidity are associated with firm value overestimation. The paper contributes to the literature on firm valuation by using an important database with hand collected data from all firm valuation processes recorded at the CVM. Studies on firm valuation in Brazil are still scarce so that the finding that ownership concentration matters for firm valuation is important by showing that such process may be a source of agency conflicts.