Page info: *Author:Mathiesen, H. *Document version:2.5. *Copyright 1997-2019, H. Mathiesen.Legal notice. 


Exhibition: Private or public - The effect on enterprise valuation


Introduction: This exhibition presumes understanding of concepts from the exhibition: Why the equilibrium stock price is fluctuating. One of the central differences between private and public firms is the functioning of their valuation mechanisms. Public enterprises are foremost valued on the stock market because the stock market provides value assessments on a continuous and updated basis contrary to book values that at most are reported quarterly. Measuring historical values rather than discounted future income is another disadvantage of book values. On the other hand, the valuation of privately owned firms relies mostly on book values because they typically are reported more frequently than private bargain prices. Indeed, some jurisdictions do no require private owners to disclose their bargains at all. The blue graphs in the upper part of the figure respectively represent the continuous market valuation of public firms and the discrete bargain valuation of private firms. The lower part of the figure shows the reported book value in terms of 'true' book value for both private and public firms. This index is normally never close to 100% because of measurement errors / biases, and more interestingly, because of incentives to manipulate reported book values. For instance, firms that make plenty of money have incentives to understate their success in order to save tax payments. On the other hand, firms that perform poorly have incentives to boost book values and earnings in order to hide their problems from creditors and other pertinent parties. Get more info by clicking the links within or below the figure.


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-Copyright 1997-2019, H. Mathiesen. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.Legal notice.