This paper uses regression analysis and alternative ranking to expand on the early findings by Covrig et al. that financial metrics (such as revenue or EBITDA) volatility are negatively related to firm size. We found that the impact of firm size on volatility is stronger than originally documented and is robust when one considers financial leverage and profits, as well as industry factors. Further, the relation between size and metric volatility is stronger for smaller firms. We also calculated the volatility ratio, volatility of the smallest firms divided by the volatility of the largest firms, for the metrics and found that the volatility ratios varied between 1.5 and 2.0, meaning that for a ratio of 1.5 the volatility of small firms was 50% higher than the volatility of large firms, consistent with our practical experience. Finally, the volatility levels fluctuate over time, but without any long-term discernible trends, and the volatility ratios are relatively stable across time.
An absolute control interest is ownership of 100% of the voting interests. A lack of absolute control interest is ownership that is greater than 50% and less than 100% of the voting interests. Only an absolute control interest has no control-related risk; all other ownership interests have some degree of control-related risk. Market participants pay higher control premiums for greater voting ownership, and this paper provides empirical evidence. As the ownership percentage decreases, the control premium decreases and the implied discount for lack of absolute control increases. The paper provides data on the magnitude of the discount for lack of absolute control.
This article examines how changes in debt levels impact equity volatility using historical data. By observing absolute volatility changes for publicly traded companies over periods in which the company’s size ranking does not change but its debt level ranking does, I am able to better isolate the impact of leverage on equity volatility. Consistent with my earlier articles, I find the Merton model does poorly particularly in the mid-leverage range (20%–60%) and tends to overstate equity volatility adjustments more when the subject company has a higher leverage ratio than the guideline public company proxy compared to the opposite.
Classic theory in business valuation presumes that customer concentration (CC) increases risk and therefore lowers value. New research suggests that CC, depending on the circumstances, can have positive effects, all other things being equal, that support increased continuing cash flows and symbiotic relationships, thereby improving the overall value of a business. Nonetheless, CC always has the risk of an abrupt ending, increasing risk to an owner. This article follows the presentation made at the 2023 International Conference of the American Society of Appraisers. Customer situations are specific to the subject company and sometimes industry focus.
Opinions in appraisal and damages cases from 2021 to 2024 in Delaware are reviewed here. It reviews and summarizes Delaware Supreme Court and Court of Chancery decisions that relate to valuation issues and criticizes the decision in one case ( FairXchange ). It concludes with a discussion of the key points in these 2021–2024 decisions that are relevant to the valuation community and to potential expert witnesses.
