Valuing Minority Interests

Abstract

For many firms, the value of common equity is affected by the value of two types of minority interests: equity method investments (the company’s significant minority stakes in affiliated entities), and non-controlling interests (outside minority interests in the company’s partially-owned subsidiaries). In most cases little information is provided on these claims, and their value is accordingly estimated using book value. This study develops an algorithm to estimate the value of minority interests using book value, earnings, and the average pricing of these fundamentals in the firm’s industry. Valuing minority interests using the algorithm instead of book value results in statistically and economically significant improvement in the accuracy of the estimated value of common equity.