Valuation Practitioners Research Articles

An evaluation of the use of professional judgement in corporate valuations in South Africa

Purpose: Global merger and acquisition and capital market activity have increased over the last decade. A key determinant of the value of these transactions are the results of corporate valuations, which require technical expertise as well as professional judgement. The purpose of this research is to identify aspects of corporate valuations, for the purposes of mergers and acquisitions, which require professional judgement and to understand why the judgement is necessary.Design/methodology/approach: We followed a mixed-method approach by gathering data from valuation practitioners using a survey, followed by semi-structured interviews.Findings/results: We find that professional judgement is required throughout the process, from identifying the most appropriate approach to adjusting theoretical valuation inputs. Industry and market nuances are key reasons for professional judgement as is the perceived lack of appropriate asset pricing models.Practical implications: The views of practitioners, juxtaposed with academic literature on investment theory, have the potential to contribute to the establishment of best practice in corporate valuations.Originality/value: Prior academic research has focused largely on the technical aspects of corporate valuations. In this research, we present the first-hand experiences of practitioners whose professional judgements are a key contributor to the valuations that underpin corporate actions in the South African market. This research extends both academic as well as corporate research.

DATA-TYPE ADJUSTMENT FOR RESIDENTIAL PROPERTY VALUATION IN JAKARTA: AN EXPLORATORY STUDY

Valuers model market behaviour to estimate market value in property valuation. This requires a sufficient number of arm’s length transaction price as comparables. In the Indonesian context, this proves to be difficult given the lack of market transparency. Thus, valuers often rely on asking price in their analysis. This may affect the accuracy of their value estimate as asking price does not represent property market. Asking price needs to be adjusted to arm’s-length transaction better. This research seeks to study the magnitude of such adjustment. For this purpose, asking price and their corresponding transaction price of 331 properties in Jakarta were analysed. A questionnaire was also administered to capture the adjustment commonly used by valuation practitioners. The data shows that on average, asking price is 6% higher than its transaction price with no significant differences across areas in Jakarta. This is far below the 14% average adjustment used by valuers in their practice.

A Comprehensive Analysis of the Literature to Determine Whether the Quantity and Quality of Market Inputs Utilized for Valuation Have a Significant Impact on the Accuracy of the Fair Value of PPE

This study researches the impacts of market inputs on the accuracy of Fair Value (FV) assessment for Property, Plant, and equipment (PPE). It aims to address the gaps and limitations in the existing literature by examining the relationship between market inputs and the valuation accuracy of PPE across various businesses and settings. Prior research has focused on FV assessment of specific asset classes or industries. The research goals are to look at the significance of market inputs in FV assessment and decide their general importance in PPE valuation. This study demonstrates the significance of relevant and trustworthy market inputs for valuers in arriving at reliable FV estimates. The main results of the study show that Valuers should use a combination of income-based and market-based methods to value PPE assets for accounting purposes taking into account industry-specific factors that can affect the FV. The study offers suggestions for valuation practitioners, regulators, and accounting professionals to increase the accuracy and dependability of PPE valuations based on its findings. This study supports to improve the credibility of value opinions, encourage consistency and transparency in reporting, and ultimately make it easier for stakeholders to make informed decisions by implementing these recommendations. By examining the significance of market inputs and highlighting inconsistencies in empirical evidence, this study concludes that it contributes to our understanding of FV estimation for PPE.

A multi-criteria decision framework for IP valuation method selection: “Valuation case” matters

This paper explores the applicability of IP (Intellectual Property) valuation methods in the university TTOs context by using multi-criteria decision-making frameworks. The IP valuation methods are evaluated for their usage in university IP and Startup valuation, patent or patent-pending technologies, and different Technology Readiness Levels (TRLs). Data was collected through in-depth structured interviews and a Delphi survey with 17 experts. By descriptive analysis of responses and consensus rates, we proposed a combined multi-criteria decision-making model of Analytical Hierarchy Process (AHP) and Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) for university Technology Transfer Offices (TTOs) to be utilized in selecting appropriate IP Valuation methods. Findings reveal that more than one method should be used to make well-supported estimates for patent value. DCF method is the most suggested method. Income methods are most favourable on University IP, Startup's IP, non–patented or patent-pending, TRL 1–6 technologies. Findings can help valuation practitioners, especially from TTOs, design roadmaps for IP valuation.

Spatial econometrics and spatial hedonic model in property valuation: A bibliometric analysis

The econometric and hedonic analysis offers reliable input in property valuation, primarily for economic studies and the country’s revenue. However, the lack of spatial reliability in statistical analysis has become a serious debate among researchers. This research is carried out to review the current trend and pattern of literature and visualize the network of the authors, countries, and keywords applied in property valuation by emphasizing the application of spatial analysis in econometric and hedonic using bibliometric analysis. The increment of documents related to spatial analysis, especially the approach of Spatial Econometric (SE) and Spatial Hedonic (SH) in property valuation, has indicated the current interest of researchers around the globe. A few bibliometric analyses are done on the Hedonic Pricing Method (HPM) and property valuation issues. Still, the attention of the review on emphasizing the spatial element is limited. Three hundred ten (310) documents are involved in the bibliometric analysis related to the property valuation issue from the Scopus database. The methodology was according to the modified Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) to provide clarity in screening and filtering documents. VOSviewer, Harzing’s Publish or Perish (PoP), and Microsoft Excel are used to ease the analysis process. This research will provide a basis to unlock new research opportunities for scholars and assist property valuation practitioners with an efficient valuation approach with spatial application. An efficient property valuation approach would drive a comprehensive insight into supporting sustainable economic and living quality. Keywords: Bibliometric, property valuation, spatial econometric, spatial hedonic

Strengthened multi-stakeholder linkages in valuation studies is critical for improved decision making outcomes for valuable mangroves – The Malaysian case study

Mangrove forests in Southeast Asia are continuously declining as a result of unsustainable practices, partly due to limited recognition of the value of mangrove services in land use decision making. Valuation practitioners have assumed that monetary valuation should inform local and national decision makers to ensure sustainable management of mangrove resources. For ecosystem service valuation to be of use to decision makers, best practices should be adhered to such as having straightforward policy questions and strong stakeholder engagement from the onset of valuation studies, suitable choice of valuation methodologies, and the ability to effectively demonstrate causal links between drivers of ecosystem health, change, and resource users. This study, focusing on the Malaysian case study, assessed the effectiveness and challenges of local ecosystem service valuation studies in informing mangrove management decisions against a set of global best practices. A systematic review approach was undertaken to identify relevant Malaysian mangrove ecosystem service valuation studies. Of 184 studies identified, only 17 provided monetary values for mangrove ecosystem services. These studies valued nine different mangrove ecosystem services, with the cultural ecosystem services of tourism being the most frequently valued. Most of the valuation studies were designed to raise awareness of the value of ecosystems (64.7%). Other intended uses included determining appropriate charging rates for mangrove uses (17.6%), comparing the costs and benefits of different environmental uses (11.8%), and providing a justification and support for certain decision making (5.9%). Overall, mangrove valuation studies in Malaysia were characterized by weak multi-stakeholder engagement, non-standardized valuation units across the whole country, limited dissemination of the valuation outcome, and cursory references to the potential use of mangrove ecosystem services. Most of the studies did not exert apparent influence on mangrove management. Future valuation studies in Malaysia and the Southeast Asian region should aim to build more robust engagement between valuation practitioners and key stakeholder groups, especially decision makers, at all stages of the study process and incorporate a clear dissemination strategy for sharing results.

Evaluation of the Education and Training of Valuation Surveyors in Uganda

In the developing world, matching the education and training of Valuation Surveyors with the needs of the industry is increasingly becoming challenging. This is largely due to globalisation, commercialisation, and advancements in information and communications technology, among others. In Uganda, while curricula are reviewed at least every after five years, the technologies and the market requirements continue to evolve, affecting the skills and knowledge passed on to graduates at universities and other tertiary institutions. This paper evaluates the education and training of Valuation Surveyors in Uganda, through a stakeholder survey, to determine the gaps in training and suggest ways on how to fill the gaps and consequently improve the valuation surveying curriculum. A questionnaire designed to capture both quantitative and qualitative data was administered to valuation practitioners and students. Over 49% of the respondents suggested the need for constant review of curriculum and adoption of a more practical approach to learning, as one of the major ways of bridging the gap between the education system and the changing industry. The findings of the study can be used by stakeholders in the education sector, to identify and prioritise the training needs of valuation students in different institutions for quality improvement purposes.

Changing tenant covenant perceptions and flexibility in the lease model in UK city centres

ABSTRACT The retailing industry in the UK is experiencing unprecedented structural change. The impact on retailers has often dominated headlines, along with the impacts on local services and economies, but with little attention given to the implications for property owners and practitioners. Exploring and understanding the responsiveness of landlords, and their behaviours, is essential to understanding the adaptiveness of a retailing system. This study employs semi-structured interviews to examine the short- and long-term changes in the retail market and the actions of landlords in response. The findings span the period prior to and during the first year of the Covid-19 pandemic in 2020, and reveal that fundamental changes have occurred to establish tenant covenant norms and the traditional retail leasing model. The paper explores these changes, including a shift in tenant risk, reposition of the leasing model in favour of tenants, generally, and greater application of turnover rents. The pressing challenge for current valuation practitioners, therefore, is to incorporate these fundamental changes within the market into the pricing of retail assets. Significant progress in this area to date, as explored in the paper, has been limited although greater application of discounted cashflow techniques is set to be encouraged by the RICS.

Attrition Analysis, Midperiod Convention and Customer Retirement Forecasts

Attrition analysis is widely used by valuation professionals as a recognized method to forecast customer population retirement behavior. With attrition analysis, an expected customer population retirement profile is developed through the study of historical customer retirement activity and applied to the customer population when valuing customer relationship intangible assets. As a frequent reviewer of customer relationship valuations, valuation practitioners regularly develop an attrition analysis founded on a midperiod retirement convention but then apply an end of period convention when forecasting customer retirements. Since attrition analysis relies on midperiod retirement convention and the exponential distribution, analytical consistency is maintained when a midperiod retirement convention is used to forecast customer retirement behavior for the valuation of customer relationship intangible assets.

Impact of Economic Recession on the Valuation of Closely Held Construction Companies

ABSTRACTThis paper is a non-fraud forensic examination of how various business valuation measures of privately held construction companies were impacted during the great recession (2007–2009). We examine 1,037 transactions from IBA Market Data comparing the mean values of revenue, seller's discretionary earnings (SDE), price, price/sales, and price/SDE from 2005–2016. We performed one-way ANOVAs to examine differences in mean values for four three-year time periods. We performed a stepwise multiple regression for the dependent variable Price. The results of the ANOVAs show that revenue, price, price/sales, and price/SDE were lower during the 2008–2010 time period, all significant at the 0.01 level. The results of the multiple regression show revenue as a predictor of transaction price, with an adjusted R2 of 0.559 and a p-value of 0.000. The results would be useful to valuation practitioners, and to academics using a case approach where valuation multiples must be selected.

Four propositions about how valuation intervenes in local environmental politics

Abstract Environmental valuation provides a way of soliciting and organising information about how people relate to their environments. By canvassing a broad spectrum of human–nature relationships, valuation practice seeks to make environmental decision‐making more inclusive of diverse human concerns and aspirations. When valuation is undertaken in real‐world decision‐making settings, choices must be made about how to adapt valuation into context. Generic guidance illuminates choices of theory and method, as well as practical issues such as cost and complexity; however, little guidance exists on how to understand and respond to the political implications of valuation in places. To address this, we develop four propositions on how valuation intervenes into conflicted environmental decision‐making contexts, drawing on interviews with government officials and marine values‐holders from Aotearoa New Zealand's Marlborough Sounds. Valuation intervenes in politics by (i) vesting certain scales and actors with authority, (ii) aligning with or contesting existing regulatory categories, (iii) reallocating expertise about the environment and (iv) reproducing or reworking the uneven playing field of decision‐making. Understanding these implications can support valuation practitioners to situate their work within locally relevant contexts and objectives. These propositions provide a way of grasping the mechanisms through which valuation intervenes in local political struggles for environmental authority. Using these prompts, and developing others, can help valuation practitioners to ‘do good’ through seeking place‐based environmental justice and sustainability. A free Plain Language Summary can be found within the Supporting Information of this article.

The Impact of Size and Leverage on Equity Volatility

Many valuation practitioners rely on equity volatilities when performing equity allocations, derivative valuations, discounts for lack of marketability, or contingent consideration analyses. Yet in contrast to other commonly accepted valuation adjustments,1 practitioners still appear hesitant to adjust historical or implied volatilities from publicly traded comparables for differences in size when performing these types of analyses, despite theory that these factors should impact equity volatility.2 Instead, preference is usually made in the industry to adjust equity volatilities for leverage alone. In this paper I provide analytical support across a twenty-year time horizon using a five-year lookback period to examine the empirical impact of size and leverage on equity volatilities. I find that size has substantial impact on equity volatilities and provide suggested volatility size adjustments for equity volatility. Further, I find evidence that while leverage does have an impact on equity volatilities, ...

Individual contributions, provision point mechanisms and project cost information effects on contingent values: Findings from a field validity test

In many instances, Contingent Valuation practitioners rely on voluntary monetary contributions, despite the fact that they are deemed to be neither incentive compatible in theory nor demand revealing in practice. The reason is that they are suitable for most field applications and offer benefits that may outweigh their drawbacks. This paper endeavors to contribute to the literature by exploring the effect of donation payments with differing incentive structures and information levels on contingent values and on respondents' uncertainty regarding the donations declared. To this end, a field survey was conducted using a sample of 332 respondents who were randomly assigned to one of three different mechanisms: (1) individual contribution (hereinafter CVM treatment); (2) individual contribution with provision point mechanism (PPM), where the total cost of the project is unknown (hereinafter PPM treatment); and (3) individual contribution with PPM, where the total cost of the project is known (hereinafter PPM-INF treatment). The results indicate that there are no statistically significant differences in willingness to pay (WTP) estimates between the CVM and PPM treatments nor between the PPM and the PPM-INF treatments. The results also indicate that the PPM has a positive effect on respondents' certainty level, but there is no evidence that the certainty level is affected by the project information cost. The results are mixed compared to previous research efforts. Thus, further tests are necessary in field comparisons and under different information environments before any definite recommendations can be made.

Sources and reliability of property market information for property valuation practice in Ghana

PurposeAdequate reliable property market data are critical to the production of professional and ethical valuations as well as better real estate transaction decision-making. However, the availability of reliable property market information represents a major barrier to improving valuation practices in Ghana and it is regarded as a key challenge. The purpose of this paper is to investigate the sources and reliability of property market information for valuation practice in Ghana. The aim is to provide input into initiatives to address the availability of reliable property market data challenges.Design/methodology/approachA mixed methods research approach is used. The study, thus, relies on a combination of a systematic identification and review of literature, a stakeholder workshop and a questionnaire survey of real estate valuers in Accra, Ghana’s capital city to obtain requisite data to address the aim.FindingsThe study identifies seven property market data sources used by valuers to obtain market data for valuation practice. These are: valuers own database; public institutions; professional colleagues; property owners; estate developers; estate agents; and the media. However, access to property market information for valuations is a challenge although valuers would like to use reliable market data for their valuations. This is due to incomplete and scattered nature of data often borne out of administrative lapses; non-disclosure of details of property transactions due to confidentiality arrangements and the quest to evade taxes; data integrity concerns; and lack of requisite training and experience especially for estate agents to collect and manage market data. Although professional colleagues is the most used market data source, valuers own databases, was regarded as the most reliable source compared to the media, which was considered as the least reliable source.Research limitations/implicationsFindings from the study imply a need for the development of a systematic approach to property market data collection and management. This will require practitioners to demonstrate care, consciousness and a set of data collection skills suggesting a need for valuers and estate agents to undergo regular relevant training to develop and enhance their knowledge, skills and capabilities. The establishment of a property market databank to help in the provision of reliable market data along with a suitable market data collection template to ensure effective and efficient data collection are considered essential steps.Originality/valueThe study makes a significant contribution to the extant knowledge by providing empirical evidence on the frequency of use and the reliability of the various sources of market data. It also provides useful insights for regulators such as the Ghana Institution of Surveyors (GhIS), the Royal Institution of Chartered Surveyors (RICS) and other stakeholders such as the Commonwealth Association of Surveying and Land Economy (CASLE) and the Government to improve the provision of reliable property market information towards developing valuation practice not only in Ghana, but across the Sub-Saharan Africa Region. Also, based on these findings, the study proposes a new property market data collection template and guidelines towards improving the collection of effective property market data. Upon refinement, these could aid valuation practitioners to collect reliable property market data to improve valuation practice.

Technology Trade and Valuation Model of Technology Factor Method

This study analyzes the applicability of a technology valuation model from methodological and practical perspectives on international technology trade. To accommodate high uncertainties in cross-border technology trades, international valuation practitioners prefer using the income approach which is based on the discounted future cash flows from the subject technology valued. This study analyzes the technology factor method (TFM) and suggests an improved valuation model relevant to international technology trade by presenting valuation results of a hypothetical case. TFM’s estimation process starts with the assessment of the risks (uncertainties) related to the successful application and commercialization of the subject technology. After determining an entity’s overall business value created by the subject technology, TFM multiplies this value by the technology’s contributory factor. In domestic technology transactions, TFM estimates the contributory proportion of technological asset to be from 1/4 to 1/3. In international technology trades, however, this study suggests that TFM take into consideration additional factors such as trade utility and trade tendency when estimating the contribution factor. This study’s case analysis confirms that the suggested method mitigates the traditional TFM’s prerequisites on efficiency, completeness, and comparability of international technology trading markets. The suggested TFM is expected to shed new light on international technology valuation, by promoting international technology trades.

The effect of green envelope components on green building value

PurposeThe purpose of this paper is to identify green envelope building components of residential buildings applicable under hot and humid climates and to analyze the effect of these components on building value.Design/methodology/approachThe authors place an emphasis on green envelope components that influence building value and which are derived based on their integration into a building envelope structure that is applicable under hot and humid climates. This is performed through identification of green benefits of each green envelope component based on literature reviews and in relation to green criteria listed by the Malaysia Green Building Index (GBI). Consequently, a quantitative analysis has been conducted to determine the effect of these green envelope components on building value by means of a questionnaire distribution among 550 property valuation practitioners in Malaysia. However, in order to certify respondents’ credibility, the authors analyzed questionnaires answered by property valuation practitioners with experience in green valuation.FindingsThe findings show that there are ten green envelope components currently certified under GBI Malaysia and applicable for hot and humid climates. There are three green envelope components that can increase property values, specifically: solar photovoltaic, green living wall and green roof. However, eight of the green envelope components have no effect on building value.Research limitations/implicationsDue to the relative immaturity of the green building market in Malaysia, the authors were unable to analyze the actual percentage of increment on building value as conveyed by each green envelope component.Originality/valueThis paper aims to provide understanding of the effect of individual green envelope components on building value rather than merely the value of green buildings in general. It proves that green building envelope components do in fact contribute to an increase in green building values. As the green building market in Malaysia is still in its infancy, this study is significant in that it prepares the Malaysian green building market to attain a new level by providing valuation practitioners with awareness of green building values and new knowledge concerning the effect of individual green components on building values. Hence, it is anticipated that this study can assist property valuation practitioners in conducting valuations of green buildings in the future.

Value in the eye of the beholder: a survey of valuation practices of Estonian financial professionals

This is the first empirical study related to the linkage between distributed profit taxation and company valuation. In this paper we present the results of a survey of Estonian valuation practitioners. The main purpose of this study is to clarify the valuation practices of Estonian analysts with emphasis on fundamental analysis-based valuation methods. We elucidate whether and how practitioners treat certain aspects of corporate income taxation when valuing Estonian companies, and how they adjust conventional models taking into account the peculiarities of the Estonian distributed profit taxation system. As distributed profit taxation allows Estonian companies to postpone their income tax liability, it should lead to a positive impact on the value of Estonian companies compared to non-Estonian ones. The survey also included hypothetical valuation cases seeking to determine the difference in analysts’ views on equity value in a simplified framework. Results show that free cash flow to the firm and EV/EBITDA multiples are the most popular valuation models among analysts, with the majority of analysts using these models together. Analysts adjust models primarily when calculating the cost of capital and forecasting corporate income tax liability. However, many respondents did not make any adjustments when valuing Estonian companies, but proceeded from the same grounds when valuing Estonian and non-Estonian businesses. The equity valuation of hypothetical companies revealed highly diverse estimates and an unawareness of the positive aspects of distributed profit taxation vis-à-vis traditional profit taxation on a company’s value

Why Salvador Dali Would Not Have Made a Good Appraiser: BV and Real Estate Discount Rates

The famous artist Salvador Dali is quoted as saying “What is important is to spread confusion, not eliminate it.” While this may be so in art, it is unlikely to be the mantra of any valuation practitioner. Valuation is practiced by thousands of individuals, and it is important that these practitioners all speak the same language so the clients who rely on these valuations can make unified and reasonable decisions. Problems arise, however, when similar language is used to mean different things to different people. Such is the case in business valuation and real estate appraisal. Generally, real estate appraisers and business valuation practitioners do not venture into each other’s territory. However, there is often good reason to do so, and these situations highlight the importance of consistency, particularly with respect to the use of language and the interpretation of language. For example, based on our own experience, the term “ unleveraged Internal Rate of Return [IRR],” as used by real estate apprais...

Why We Shouldn't Add a Size Premium to the CAPM Cost of Equity

Practitioners commonly augment the CAPM cost of equity by adding the Size Premium in Excess of CAPM published in the Ibbotson and Duff & Phelps yearbooks. However, the empirical evidence following Banz’s paper in 1981 does not support the existence of a size premium. Moreover, even if a size premium is deemed to be warranted, the Size Premium in Excess of CAPM as calculated by Ibbotson and Duff & Phelps are inconsistent with the CAPM cost of equity estimated by valuation practitioners and it also does not appropriately measure the size premium applicable in a DCF analysis. Therefore, adding the Size Premium in Excess of CAPM is no different than adding an arbitrary number to the CAPM cost of equity. In this paper, I provide an illustration of how to calculate a Practitioner-Consistent Size Premium to potentially resolve these issues. However, the results of that analysis yields unreliable results.

Estimating indigenous cultural values of freshwater: A choice experiment approach to Māori values in New Zealand

Indigenous cultural values of freshwater resources are important in many communities, however, they are not always included in non-market valuations. While measuring cultural values can be challenging, the omission could lead to incomplete information for policy implications. This paper reports results of a choice experiment study which included a Māori cultural attribute. This attribute was considered alongside economic, recreational and environmental attributes of freshwater, all of which are impacted by the changing land-use in Canterbury, New Zealand. The results show positive willingness-to-pay for all attributes where change from poor to excellent habitat quality ($123/year) was valued highest. The cultural attribute, specifically, was valued in mid-range between economic, recreational and environmental attributes. Estimated willingness-to-pay were $40/year by Māori, and $28/year by the general public, to enhance Māori cultural attributes, where Māori willingness-to-pay is indicative only due to a small number of respondents. Importantly, this demonstrates support for the management outcome for cultural attributes, which is valued not only by those who directly participate in this use. This suggests that non-market valuation practitioners should be aware of indigenous cultural values, the omission of which could have impacts on welfare estimates and subsequent decision making.