use in valuing any particular target company (which may often be worldwide basis – which includes many
unquoted), taking into account known factors infl uencing perceived if not most of them.
risk such as size, diversity of earnings and industry sector? An example of the above problem is
Th e Ohlson-Juettner (O-J) Model is one of the two models the research undertaken at the
referred to above. Th e original paper included an appendix to show Manchester Business School by Weimin
how the model can be implemented in practice. Th is equity valuation Liu, which resulted in the development
model allows either borrowing or lending if the payout ratio assumed of a two-factor liquidity-adjusted capital
is either too high or too low. Unfortunately, the symbol ‘b’ represents asset pricing model. Th is model allows an
borrowings only if negative, and an investment in marketable improved measure of beta to be
securities, if positive. To any reader unaware of this, the model determined for, in particular, the smaller,
appears to produce a value for the equity that is increased by the value less liquid quoted companies and hence
of the initial borrowings fi gure – which, of course, would be incorrect. allows a more accurate assessment of the
With a positive value for ‘b’ representing an initial investment in true costs of equity associated with
marketable securities, however, then the model does indeed correctly investing in such companies.
show the resulting value of the equity increased by this amount! Unfortunately, owing to the research
behind this development having been
LIMITED MARKET INFORMATION conducted using exclusively US-based
Th is lack of relevance is inextricably linked to the issue of researchers data, the model’s application to the UK
based in other countries using market information exclusively limited and wider markets remains to be
to companies quoted and trading on the three US stock markets: demonstrated, and there appears to be
NYSE, AMEX and NASDAQ. little prospect of suffi cient funding to
Th e reasons for the above emphasis on the use of US market allow this to happen.
information are not just those of cost and availability but rather Another consequence is that there
– perhaps more seriously – to do with the perception by researchers is less opportunity for the funding of
based in other countries that, in order to gain the necessary academic research by commercial
recognition by other academics (in the form of cross referrals and organisations. For example, research is
references to their own articles), they need to publish in US being conducted at the University of
journals. Regrettably, to do so, the researchers believe – probably Cologne into the valuation of equities
with some justifi cation – that the research must be based on US data using market multiples and controlling
in order to be accepted by the editors of these journals. for diff erences among peers. But as the
fi gures being used for this research are
DATA BIAS exclusively for US-quoted companies,
Perhaps what is now required is a comprehensive, co-ordinated and many of the issues of particular
sustained campaign to convince editors that the prestige of their own relevance to European stocks are not
journals would be enhanced by encouraging more widely relevant being given an appropriate degree of
research in the fi rst place.
One consequence of the bias towards the use of exclusively
US-based data is that some excellent valuation-related research
conducted in the UK and in Europe is found to have only
limited relevance to not only those countries’ valuation
professionals and practitioners, but also limited relevance to
those US-based investment houses which happen to invest on a
“This lack of relevance is linked
to researchers based in other countries using
emphasis, such as the frequent
occurrence of European companies
with signifi cant unfunded pension
market information exclusively limited to
liabilities held off -balance sheet, or the
number of companies with high levels
companies quoted on US stock markets”
of investment into research and
development activities.
36 WINTER 2008/09
35-3735-37 research.indd 36research.indd 36 27/11/0827/11/08 16:59:5416:59:54
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