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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. Note: All bold text in figure below can be
clicked to obtain more information (If you can’t click
here). |
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- Copyright 1997-2010, ViamInvest. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Legal notice. |