The marketability discount in Spanish valuation multiples: investors’ perception in listed companies versus private transactions
Abstract
The aim of this paper is to assess the fair marketability discount (MD) in the Spanish market for valuation multiples comparing public versus private transactions. The study finds that to obtain MD it is necessary previously to control by a battery of factors that affects ratios’ prices such as industry, firm size, profitability, risk, year and also other characteristics about the buyer. The interactions of MD with each variable showed different investors’ perceptions about non marketability enterprises explaining MD. The valuation methodology applied in the research was a cross section of 824 public and private acquisitions in the Spanish market from the period 2006−2017. This work represents important evidence, in a more integrated vision than previous literature, for analysts and regulators stressing the necessity to apply MD in Spanish valuation processes based in listed multiples.
Keyword : valuation multiples, ratios analysis, marketability discount, illiquidity discount, market ratio valuation, EBITDA ratio
How to Cite
Rodríguez López, Ángel, & Rubio Martín, G. (2019). The marketability discount in Spanish valuation multiples: investors’ perception in listed companies versus private transactions. Journal of Business Economics and Management, 20(1), 107-130. https://doi.org/10.3846/jbem.2019.8101
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Damodaran, A. (2005). Marketability and value: measuring the illiquidity discount. SSRN Electronic Journal, 60. http://doi.org/10.2139/ssrn.841484
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Kim, M., & Ritter, J. R. (1999). Valuing IPOs. Journal of Financial Economics, 53(3), 409-437. https://doi.org/10.1016/S0304-405X(99)00027-6
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Koeplin, J., Sarin, A., & Shapiro, A. C. (2000). The private company discount. Journal of Applied Corporate Finance, 12(4), 94-101. https://doi.org/10.1111/j.1745-6622.2000.tb00022.x
Kooli, M., Kortas, M., & L’ her, J. F. (2003). A new examination of the private company discount: The acquisition approach. The Journal of Private Equity, 6(3), 48-55.
Lie, E., & Lie, H. J. (2002). Multiples used to estimate corporate value. Financial Analysts Journal, 58(2), 44-54. https://doi.org/10.2469/faj.v58.n2.2522
Liu, J., Nissim, D., & Thomas, J. (2002). Equity valuation using multiples. Journal of Accounting Research, 40(1), 135-172. https://doi.org/10.1111/1475-679X.00042
López, Á. R., Antón, A. J. M., & Cerviño, E. F. (2011). The impact of financial crisis on profitability, asset turnover and state aid in SMEs. African Journal of Business Management, 5(33), 12.749-12.753. https://doi.org/10.5897/AJBM11.484
Officer, M. S. (2007). The price of corporate liquidity: Acquisition discounts for unlisted targets. Journal of Financial Economics, 83(3), 571-598. https://doi.org/10.1016/j.jfineco.2006.01.004
Paglia, J. K., & Harjoto, M. (2010). The discount for lack of marketability in privately owned companies: a multiples approach. Journal of Business Valuation and Economic Loss Analysis, 5(1). https://doi.org/10.2202/1932-9156.1089
Pratt, S. P. (2009). Business valuation discounts and premiums. New Jersey: John Wiley & Sons.Rubio Martín, G. (2019). European valuation multiples: the investors’ sentiment about size. Spanish Journal of Economics and Finance, 42, 173-188. https://doi.org/10.32826/cude.v42i119.86
Schweiger, D. M., & Very, P. (2003). Creating value through merger and acquisition integration. In Advances in mergers and acquisitions (pp. 1-26). Emerald Group Publishing Limited. https://doi.org/10.1016/S1479-361X%2803%2902002-7
Serra, R. G., & Fávero, L. P. L. (2017). Multiples’ valuation: the selection of cross-border comparable firms. Emerging Markets Finance and Trade, 54(9), 1.973-1.992. https://doi.org/10.1080/1540496X.2017.1336084
Silber, W. L. (1991). Discounts on restricted stock: The impact of illiquidity on stock prices. Financial Analysts Journal, 47(4), 60-64. https://doi.org/10.2469/faj.v47.n4.60
White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica: Journal of the Econometric Society, 48(4), 817-838. https://doi.org/10.2307/1912934
Wruck, K. H. (1989). Equity ownership concentration and firm value: Evidence from private equity financings. Journal of Financial Economics, 23(1), 3-28. https://doi.org/10.1016/0304-405X(89)90003-2
Young, S., & Zeng, Y. (2015). Accounting comparability and the accuracy of peer-based valuation models. The Accounting Review, 90(6), 2571-2601. https://doi.org/10.2308/accr-51053
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Bajaj, M., Denis, D. J., Ferris, S. P., & Sarin, A. (2001). Firm value and marketability discounts. Journal of Corporation Law, 27, 89-115. https://doi.org/10.2139/ssrn.262198
Baker, M., & Ruback, R. S. (1999). Estimating industry multiples (Working Paper). Harvard University, Cambridge, MA. Retrieved from https://www.hbs.edu/faculty/Pages/item.aspx?num=1435
Block, S. (2007). The liquidity discount in valuing privately owned companies. Journal of Applied Finance, 17(2), 1-33.
Bhojraj, S., & Lee, C. (2002). Who is my peer? A valuation‐based approach to the selection of comparable firms. Journal of Accounting Research, 40(2), 407-439. https://doi.org/10.1111/1475-679X.00054
Celli, M. (2017). Minority discount for reduced powers in negotiations of non-listed minority holdings: evidence from European countries. International Journal of Business and Management, 12(4), 1-23. https://doi.org/10.5539/ijbm.v12n4p23
Cooney, J. W., Moeller, T., & Stegemoller, M. (2009). The underpricing of private targets. Journal of Financial Economics, 93(1), 51-66. https://doi.org/10.1016/j.jfineco.2008.08.001
Covrig, V., & McConaughy, D. L. (2015). Public versus private market participants and the prices paid for private companies. Journal of Business Valuation and Economic Loss Analysis, 10(1), 77-97. https://doi.org/10.1515/jbvela-2014-0005
Damodaran, A. (2005). Marketability and value: measuring the illiquidity discount. SSRN Electronic Journal, 60. http://doi.org/10.2139/ssrn.841484
De Franco, G., Gavious, I., Jin, J., & Richardson, G. D. (2008). The private company discount and earnings quality (Working Paper). University of Toronto. Retrieved from https://www.///C:/Users/Usu-ario/Downloads/The_Private_Company_Discount_and_Earnings_Quality%20(2).pdf
Dong, J., Jiao, D., & Sun, X. (2017). Acquisition discount and valuation effect of private M&As in China. Journal of Systems Science and Complexity, 30(6), 1364-1381. https://doi.org/10.1007/s11424-017-5274-x
Emory, J. D. (1997). The value of marketability as illustrated in initial public offerings of common stock (eighth in a series) November 1995 through April 1997. Business Valuation Review, 16(3), 123-131. https://doi.org/10.5791/0882-2875-16.3.123
Elnathan, D., Gavious, I., & Hauser, S. (2010). An analysis of private versus public firm valuations and the contribution of financial experts. The International Journal of Accounting, 45(4), 387-412. https://doi.org/10.1016/j.intacc.2010.09.001
Ferraro, O. (2017). Business valuation: premiums and discounts in international professional practice. In M. Bilgin, H. Danis, E. Demir, & U. Can (Eds.), Financial environment and business development. Eurasian studies in business and economics (Vol. 4). Cham: Springer. https://doi.org/10.1007/978-3-319-39919-5
Garland, P. J., & Reilly, A. S. (2004). Update on the Willamette Management Associates pre-IPO discount for lack of marketability study for the period 1998 through 2002. Insights (Willamette Management Associates), 38-44.
Grbenic, S. O. (2017). Estimating the discount for lack of liquidity in valuing privately held businesses using trading frictions of stocks in small markets: an econometric model approach. The Business & Management Review, 9(1), 1-8.
Gupta, V. (2018). Predicting accuracy of valuation multiples using value drivers: evidence from Indian listed firms. Theoretical Economics Letters, 8(5), 1-18. https://doi.org/10.4236/tel.2018.85052
Hertzel, M., & Smith, R. L. (1993). Market discounts and shareholder gains for placing equity privately. The Journal of Finance, 48(2), 459-485. https://doi.org/10.1111/j.1540-6261.1993.tb04723.x
Kaplan, S. N., & Ruback, R. S. (1995). The valuation of cash flow forecasts: An empirical analysis. The Journal of Finance, 50(4), 1059-1093. https://doi.org/10.1111/j.1540-6261.1995.tb04050.x
Kim, M., & Ritter, J. R. (1999). Valuing IPOs. Journal of Financial Economics, 53(3), 409-437. https://doi.org/10.1016/S0304-405X(99)00027-6
Kolasinski, A. C., & Kothari, S. P. (2008). Investment banking and analyst objectivity: Evidence from analysts affiliated with mergers and acquisitions advisors. Journal of Financial and Quantitative Analysis, 43(4), 817-842. https://doi.org/ 10.1017/S0022109000014368
Koeplin, J., Sarin, A., & Shapiro, A. C. (2000). The private company discount. Journal of Applied Corporate Finance, 12(4), 94-101. https://doi.org/10.1111/j.1745-6622.2000.tb00022.x
Kooli, M., Kortas, M., & L’ her, J. F. (2003). A new examination of the private company discount: The acquisition approach. The Journal of Private Equity, 6(3), 48-55.
Lie, E., & Lie, H. J. (2002). Multiples used to estimate corporate value. Financial Analysts Journal, 58(2), 44-54. https://doi.org/10.2469/faj.v58.n2.2522
Liu, J., Nissim, D., & Thomas, J. (2002). Equity valuation using multiples. Journal of Accounting Research, 40(1), 135-172. https://doi.org/10.1111/1475-679X.00042
López, Á. R., Antón, A. J. M., & Cerviño, E. F. (2011). The impact of financial crisis on profitability, asset turnover and state aid in SMEs. African Journal of Business Management, 5(33), 12.749-12.753. https://doi.org/10.5897/AJBM11.484
Officer, M. S. (2007). The price of corporate liquidity: Acquisition discounts for unlisted targets. Journal of Financial Economics, 83(3), 571-598. https://doi.org/10.1016/j.jfineco.2006.01.004
Paglia, J. K., & Harjoto, M. (2010). The discount for lack of marketability in privately owned companies: a multiples approach. Journal of Business Valuation and Economic Loss Analysis, 5(1). https://doi.org/10.2202/1932-9156.1089
Pratt, S. P. (2009). Business valuation discounts and premiums. New Jersey: John Wiley & Sons.Rubio Martín, G. (2019). European valuation multiples: the investors’ sentiment about size. Spanish Journal of Economics and Finance, 42, 173-188. https://doi.org/10.32826/cude.v42i119.86
Schweiger, D. M., & Very, P. (2003). Creating value through merger and acquisition integration. In Advances in mergers and acquisitions (pp. 1-26). Emerald Group Publishing Limited. https://doi.org/10.1016/S1479-361X%2803%2902002-7
Serra, R. G., & Fávero, L. P. L. (2017). Multiples’ valuation: the selection of cross-border comparable firms. Emerging Markets Finance and Trade, 54(9), 1.973-1.992. https://doi.org/10.1080/1540496X.2017.1336084
Silber, W. L. (1991). Discounts on restricted stock: The impact of illiquidity on stock prices. Financial Analysts Journal, 47(4), 60-64. https://doi.org/10.2469/faj.v47.n4.60
White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica: Journal of the Econometric Society, 48(4), 817-838. https://doi.org/10.2307/1912934
Wruck, K. H. (1989). Equity ownership concentration and firm value: Evidence from private equity financings. Journal of Financial Economics, 23(1), 3-28. https://doi.org/10.1016/0304-405X(89)90003-2
Young, S., & Zeng, Y. (2015). Accounting comparability and the accuracy of peer-based valuation models. The Accounting Review, 90(6), 2571-2601. https://doi.org/10.2308/accr-51053