Valuation
13th VolumeAugust 2011issue #5
IRP 2011 Singapore & Kuala LumpurA detailed travel journal
Interview D. Zane HurstValuation: The vision of an expert
Column M. Schauten PhDThe maximization of short term profits
p42p30 p35
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Valuation
Preface
Dear reader,
Before you lies the last issue of the FSR Forum of this academic year. The theme of this FSR
Forum edition is linked to a very interesting topic in today’s financial world: we will dive into
valuation. As you expect from the FSR, we will look at it on a very broad way. Many students are
interested in valuation because it is a very hot topic in today’s lectures and courses. In this issue
we discuss a lot of material from all over the world. Views about risk premium at takeovers, cur-
rency behavior in the valuation process and stock behavior. As you may expect from previous
issues, we also try to create a bridge between the theoretical part and the practical part of the
theme, as always, we will try to create that bridge with an interesting interview.
As already discussed, the theme of this FSR Forum fifth issue will be valuation and we tried to
look at it as broad as possible. In this issue you will find three interesting scientific aticles that
have a link with valuation. To create a bridge to a more practical meaning of valuation, we
interviewed D. Zane Hurst from Training The Street. Furthermore you can find content about
activities and events of the FSR.
The first article is written by David C. Smith, Associate Professor of the McIntire Center for
Financial Innovation at the University of Virginia and Brain Calvert. David C. Smith is specialized
in corporate finance and he and his co-writer will discuss company-specific risk premiums. In
this article there will be a revived debate whether or not company-specific risk is priced into the
cost of capital of a firm. It will show that there is evidence that supports original findings about
the fact that variation in cross-sectional stock returns and that holders of risky securities do
not appear to receive compensation for bearing company-specific risk.
The second article is written by Robert Comment MBA, PHD, AVA, he has studied data about
restricted stocks. He will discuss the behavior and use of restricted stocks in a business valuation.
Restricted stocks are a hot topic in business valuation. Business analysts who are working with
restricted stocks are always trying to estimate a discount for lack of marketability (DLOM). The
writer discusses the many forms of discount, why it is used and especially when it can be used.
He describes the mistake which is made very often, that discount in sales of restricted stock are
always due to restricted marketability, because discounts can also occur in private placements
of free trading shares. In the end, the writer concludes about the way the discount should be
measured and how analysts can use it in a deal.
In the last article Jamal Ibrahim Haidar discusses a special form of valuation. Currency valuation
to be specific. The writer of this article is looking to different methods to depend the real purchas-
ing power of money. At the beginning the writer is starting to discuss a measurement to compare
purchasing power of different currencies. He first looked into a tool for making purchasing power
comparisons made by The Economist, the wellknown ‘Big Mac Index’. Where the price of a regular
McDonalds Big Mac bought in the United States is compared to the price of other Big Macs around
the world. By this way you would get a simple, but good comparison about the purchasing power
of different currencies, but Jamal Ibrahim Haidar looks further. The second part of his paper pro-
vides a literature study about this ‘Burgernomics’. He will summarize the debate about purchasing
power parity and will discuss why the Big Mac Index is not a perfect measurement tool.
fsrforum • volume 13 • issue #5
2 • Preface
In this issue of the FSR Forum you can also enjoy reading an interview to shorten the gap
between theory and practice. We have interviewed D. Zane Hurst about challenging topics in
today’s financial world. Mr. Hurst is an instructor at Training The Street. The company provides
financial learning services and training in financial modelling for other companies, but also for
universities and business schools. Training The Street provides courses at for example Harvard
Business School, INSEAD, London Business School, Yale University and off course the Erasmus
University Rotterdam in collaboration with the FSR during one of our events: the Investment
Banking Masterclass. In his interview Mr. Hurst gives answers to interesting questions about
problems and issues that can appear when valuing a company.
In this issue of the FSR Forum we also have a column from Dr. Marc B. J. Schauten Phd. Mr.
Schauten is an assistant professor in finance and member of the Department of Finance at the
Faculty of Economics from the Erasmus University Rotterdam. He wrote an interesting column
about the creation of shareholder value and the maximization of short term profits.
When I look back at the fifth FSR Forum, I think this is a very interesting theme where we discuss
a very hot and broad topic. For students it is a great way to get to know the broader meaning of
valuation.
Looking back at a year as a board member of the FSR, I think I had a great experience and great
opportunities to learn much about the Erasmus University and the corporate world. As treas-
urer of the association in combination with my role as editor in chief of the FSR Forum, I had
a really busy time managing all the deadlines of articles, advertorials and invoices. But when I
see all of this year’s FSR Forum issues, I think I can be proud of my attempt of creating a bridge
between the theoretical part of some themes and the practical meanings of it in the other way.
I hope you will enjoy reading this last edition of the FSR Forum of the year 2010-2011 and I
hope it will give you good insights in the broad way of valuation.
Sincerely,
Kim de Vries
Editor in chief FSR Forum
FSR board 2010-2011
Preface • 3
Table of contents
ColofonFSR FORUM appears five times a year and is an edition of the Financial Study Association RotterdamKvK Rotterdam no: V 40346422VAT no: NL 805159125 B01ISSN no: 1389-0913
13th volume, number 5, circulation 1450 copies
Editor in chiefKim de Vries
Editorial department Rick KlootwijkRishi Sripal
Editorial advisoryDr. M. B. J. SchautenDr. W. F. C. VerschoorDrs. R. Van der Wal RA
With the cooperation ofDrs. J. G. Groeneveld RA RVM. Schauten PhdD.Z. HurstR. Comment, MBA, PHD, AVAJ. I. Haidar
Editorial addressEditiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06Postbus 1738, 3000 DR RotterdamTel. 010 408 1830E-mail: [email protected]
A Skeptical Restricted-Stock StudyRobert Comment, MBA, PHD, AVAData from restricted-stock studies are used by business-valuation analysts to estimate a dis-
count for lack of marketability, or DLOM, applicable to the valuation of a private company. The
intuition and standard rationale for the DLOM is that, even after an investor is compensated for
the risk associated with holding an asset, an asset held under effective compulsion still must be
worth less than if the asset were held by choice. This large-sample empirical study of private-
placement discounts avoids four common mistakes in restricted-stock studies and finds evidence
for a DLOM no greater than 5.6%. This estimate is not statistically significantly different from
2.5%, which is the DLOM on the riskless asset as implied by the typical yield spread between
5-year bank CDs and 5-year U.S. Treasury securities. 15
Currency Valuation and Purchasing Power ParityJamal Ibrahim HaidarThe analytical framework of currency valuation is an intellectual challenge and of influence to
economic policy, smooth functioning of financial markets, and financial management of many
international companies. The Economist magazine argues that the Big Mac Index (BMI) based
on the price of a Big Mac hamburger across the world can provide “true value” of currencies. 22
K(r)anttekeningSamen; de Europese schaduwprijsDrs. Joost Groeneveld RA RVAls businessvaluator heb ik met regelmaat te maken met partijen die ooit hebben besloten
samen te doen. (Bijna) niets is zo leuk als gedeeld enthousiasme. Iets gaan bewerkstelligen dat
je samen beter kunt bereiken dan alleen. Je stimuleert elkaar. Je kunt door werkverdeling ge-
bruik maken van elkaars sterke punten, terwijl ieders zwakke punten minder op de voorgrond
hoeven te komen. Je netwerk is groter. Je kunt aan schaalvoordelen gaan denken. En je hebt
een klankbord. De uitnodiging om iets samen te gaan doen, is bovendien een compliment. De
ander komt naar jou toe. 38
Valuation
4 • Table of contents
fsrforum • volume 13 • issue #5
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FSR News
Word of the chairman 40
FSR former board memberNelleke van ‘t Hoff 41
International Research Project 2011 42
Corporate Finance Competition 2011 47
XIVth FSR Board 2011-2012 52
FSR Alumni Association 55
FSR Activity Agenda 2011-2012 56
Company Presentations
Optiver 36www.optiver.com
Table of contents • 5
Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us?
R. Brian Calvert & David C. Smith
fsrforum • volume 13 • issue #5
6 • Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us?
This article summarizes the scholarly evidence on the effi-
cacy of including a company-specific risk premium (CSRP)
in estimates of the cost of capital.1 CSRPs are enormously
popular among valuation practitioners and are a common
component in cost-of-capital models used by many invest-
ment bankers, appraisers, business valuation specialists, and
accountants. For instance, one bankruptcy valuation special-
ist has recently written, Company-specific risk should be
considered in every bankruptcy valuation-related analysis of
any investment that is: 1. not perfectly liquid, 2. not perfectly
diversified, 3. not subject to limited liability.”2
Valuation practitioners have developed a commercially available
“models” that claims to provide a quantitative and reliable
calculation of the company-specific risk premium.3 And the
organization responsible for providing continuing education
credits to U.S. certified public accountants advises its mem-
bers to include CSRPs in valuations of small and private
companies.4
Yet, the motivation for the use of CSRPs by practitioners is
often grounded in misguided interpretations of financial
theory and a poor understanding of the existing empirical
evidence relevant to CSRPs. We argue that the weight of
theory and new evidence does not support the assertions of
some practitioners that the CSRP should be included in the
cost of capital.
Traditional thinking on company-specific risk In the context of company valuations, the cost of capital
represents the average annual return that investors can
expect to make over time on their investment in a company.
Most investments are risky, in the sense that the actual
return at any given point in time may differ from the average
return expected over a long period. Because risk-averse
investors will expect a return premium on investments that
are riskier, higher risk companies should have a higher cost
of capital than lower risk companies.
But a central question in finance and economics is what kind
of risk matters to the cost of capital? The traditional answer
to this question follows from recognizing that when investors
can easily hold portfolios of many assets, company-specific
risks – fluctuations that are unique to a particular company
– are diversified away, in the sense that the unique fluctuations
across imperfectly correlated assets cancel each other out.
The exposure that remains after diversifying away company-
specific risks is market-wide risk common across companies,
so-called systematic risk.5
Economic theory teaches us that when the cost of holding
diversified portfolios is relatively low and markets are com-
petitive, investors should only be compensated for the risk
exposure that remains when holding a diversified portfolio;
that is, systematic risk. Any premium for company-specific
risk gets competed away by return-maximizing, diversified
investors. Thus, traditional thinking teaches us that systematic
risk matters to the cost of capital, in the sense that individuals
investing in companies with higher systematic risk should
earn a higher premium for bearing that risk. Company-
specific risks should not matter, so that even when investors
choose to bear company-specific risk (by not holding a diversified
portfolio), they receive no premium for bearing that risk.6
Today, investors can select and buy at low cost a wide variety
of assets through mutual funds, index funds, defined contri-
bution pension plans, insurance companies, and can invest
directly into a variety of equities through low-cost discount
brokers. Investors have access to alternative assets markets
beyond public equity markets via hedge funds, real estate
funds, private equity funds, and a host of other investment
vehicles. Thus, the traditional view that only systematic risks
are compensable should hold in the real world for most
assets, in most markets, most of the time.
New thinking on company specific risk: Theories and evidenceNewer economic theories have taught us that there are cer-
tain conditions under which company-specific risk might be
rewarded in the cost of capital, implying a positive CSRP.
Specifically, company-specific risk might matter to the cost
of capital when one of two conditions is met: (1) a market-
wide friction exists that prevents investors from holding, as a
group, the same set of risky securities in their portfolio, or
(2) an investor chooses (or is forced) to hold an undiversified
portfolio, in which case the valuation of the risky asset is differ-
ent for that investor than other investors that hold diversified
portfolios.
Could company-specific risk matter? Condition (1) »Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us? • 7
Condition (1) challenges the traditional assumption that
investors, in aggregate, can form well-diversified portfolios
by assuming that certain groups of investors are constrained
in the types of risky assets they can hold. Possible constraints
include transactions costs, trading restrictions, incomplete
information, behavioral biases towards undiversified portfolios,
and the inability to diversify labor market income. Merton
(1987) studies a model in which investors are constrained to
gather information and invest in only a subset of all available
securities. Theoretical models similar to Merton (1987) have
also been explored by Levy (1978) and Malkiel and Xu (2004).
In these models, assumed constraints on trading prevent any
one investor from holding an optimally diversified portfolio.
When such constraints are economically significant, they
create an equilibrium pricing impact on all securities: When
one group of investors is constrained to holding a subset of
all diversifiable assets, other investors must necessarily hold
in larger supply the assets excluded from the constrained
group. Since assets cannot be optimally diversified, com-
pany-specific risk matters.
As a market equilibrium concept, condition (1) implies that
company-specific risk will be important to the pricing of all
companies in a market (large and small, public and private),
and that higher company-specific risk implies a higher CSRP.
The most important takeaway from condition (1) is that its
implications are empirically testable: If we live in a world
where frictions meaningfully constrain investment in diver-
sified portfolios, then financial statisticians should be able to
measure the magnitude of the CSRP and test whether the
CSRP is positive and economically meaningful.
Tests of whether company-specific risk matters dates back at
least to the late 1960s when researchers began to investigate
empirically the – then new – capital asset pricing model
(CAPM) developed by Sharpe (1964) and Lintner (1965). But
the early tests used relatively small samples and poor statisti-
cal techniques. Fama and Macbeth (1973) was the first study
to use a relatively large sample of stock returns and apply
sound statistical techniques to examining the CAPM. As part
of their study, Fama and Macbeth tested whether company-
specific risk earns a stock return premium once they have
properly controlled for CAPM systematic risk (i.e., “beta”).
Fama and Macbeth find the CSRP to be statistically indistin-
guishable from zero.
For nearly 30 years, the findings in Fama and Macbeth (1973)
lay to rest the question of whether company-specific risk is
compensable.7 Interest reemerged in the early 2000s following
a study by Campbell, Lettau, Malkiel, and Xu (2001) that
showed that the average total risk, and in particular, com-
pany-specific risk of publicly listed companies more than
doubled during the period 1962 to 1999. While the findings
of Campbell, et al. (2001) did not imply anything about the
compensability of company-specific risk, they did provide
researchers in the early 2000s with an impetus to re-examine
the original Fama and Macbeth (1973) results.
Table 1 provides summary information on the entire set of
new studies of company-specific risk covered in Calvert and
Smith (2011), including their publication outlet, primary
finding, and comments and critiques associated with each
study. Below, we simply highlight some of the most significant
results in these studies.
Recent empirical studies: Public firms
With an eye-catching title of “Idiosyncratic Risk Matters!,”
Goyal and Santa Clara (2003) provide one of the first post-
Campbell et al. (2001) investigations of the relation between
company-specific risk and return. Rather than look at the
relation between risk and return across companies, Goyal
and Santa Clara focus on how aggregate stock market returns
vary with aggregate measures of risk through time. They
show that aggregate stock market returns are higher when
average company-specific risk is higher, but not when aver-
age systematic risk is higher. However, the Goyal and Santa
Clara (2003) study suffers from two severe drawbacks,
detailed in a follow-up study by Bali, Cakici, Yan, and Zhang
(2005). First, Goyal and Santa Clara (2003) mix “apples and
oranges” by weighing companies differently when they compute
average market returns versus average total risk. Bali, et al.
correct this issue of comparing differently weighted samples
and show that when an apples-to-apples comparison is made
the Goyal and Santa-Clara result disappears. Second, the
Goyal and Santa Clara results appear to be highly sensitive to
the choice of sample period used in their study. The study
includes data from 1963 through the late 1990s, but excludes
data from the early 2000s that includes the stock market
crash during that period. Bali, et al. find that once you add
monthly observations through the year 2001, the Goyal and
Santa Clara findings no longer hold, even under their original
apples-to-oranges weighting scheme.
Since assets cannot be optimally diversified, company-specific risk matters.
8 • Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us?
fsrforum • volume 13 • issue #5
Ang, Hodrick, Xing, and Zhang (2006) study the cross-sectional
relation between company returns and company-specific risk
by grouping firms into portfolios according to the firms’
company-specific risk. Sorting the firms into company-
specific risk portfolios allows the researchers to maximize
the variation in company-specific risk across the firms in
their sample, while washing out measurement errors present
at the individual firm level. The findings in Ang, et al. (2006)
are surprising. They find that the average returns on portfolios
with high company-specific risk have the lowest returns,
suggesting that company specific risk premiums are negative.
The results are strong and statistically significant. For
instance, the difference in returns between the highest and
lowest company-specific risk portfolios is -1.01% per month.
This implies that in a trading strategy that buys the high
company-specific risk portfolio (expecting high returns) and
shorts the low company-specific risk portfolio (expecting low
returns) will lose more than 12% of its value each year.
The Ang, et al. paper is not without weaknesses. First, the
study calculates monthly measures of volatility by taking
averages of daily volatilities. While this methodology can
sharpen the estimates of monthly volatility (because the
researcher is using more data), it can also lead to biased esti-
mates of monthly volatility if daily price swings are affected
by market frictions such as infrequently traded stocks.
Second, they do not actually measure the relation between
returns and contemporaneous measures of company-specific
risk. Instead, they examine the relation across companies in
returns in one month against company-specific risk meas-
ured in the previous month. In an extensive follow up to Ang,
et al., Bali and Cakici (2008) study estimates of the CSRP
under a variety of different scenarios related to choice of
data, weighting of the data, and the periods over which the
data are calculated. Using a variety of specification tests, Bali
and Cakici argue that volatilities calculated using monthly
data are a better predictor of volatility patterns than those
based on daily data and should be therefore the favored
period over which to estimate risk. Importantly, the robust
finding across all Bali and Cakici specifications is that the
relation between company returns and company-specific risk
is statistically and economically indistinguishable from zero.
The implication from their tests is that there is no evidence
of a CSRP.
The findings in the Bali and Cakici study have not precluded
further endeavors to document a relation between company-
specific risk and returns. Thus far, the only published study
is Fu (2009), which reexamines the Ang, et al. results using a
forward-looking “EGARCH” predictor of company-specific
risk and finds a strong positive cross-sectional relation
between company-specific risk and returns. But Guo, Kassa,
and Ferguson (2010) and Fink, Fink, and He (2010) show
that the Fu results are driven by a “look ahead” bias that
arises because Fu uses information from the future in his
forecasts that would be unavailable to an actual investor at
the time the forecast was produced. Both Guo, Kassa, and
Ferguson and Fink, Fink, and He show that once Fu’s predic-
tive model is corrected for the look-ahead bias, no relation
exists between the forward-looking measure of idiosyncratic
risk and returns.
To sum up, while condition (1) provides a natural impetus for
thinking about why company-specific risks might matter to
the cost of capital of publically traded firms, the bulk of the
new evidence rejects the thinking in condition (1) and, more
or less, supports Fama and Macbeth’s original finding that
the CSRP is zero.
Could company-specific risk matter? Condition (2)
Under condition (2), an investor chooses (or is forced) to
hold an undiversified portfolio, in which case the valuation of
the risky asset is different for that investor than other inves-
tors that hold diversified portfolios. In contrast to condition
(1), condition (2) may imply that company-specific risk may
be important only to a smaller set of assets that are held by
undiversified investors. For instance, company-specific risks
may matter to investors in small, private companies, if these
investors are more likely to hold undiversified portfolio posi-
tions. By their very nature, these types of investors are over-
looked in the studies discussed above that focus on CSRPs in
publically traded companies. So it is certainly possible that
condition (2) holds even when condition (1) appears to be
rejected by the data.
Condition (2) has been studied by a variety of financial
researchers, typically for situations in which an entrepre-
neur chooses to put most of her wealth and human capital
into her business, or when a executive of a company is
required to hold most of his wealth (compensation in the »Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us? • 9
form of stock options, shares and pension holdings) and
salary in one company.8 These studies show that the com-
pany-specific component of a private cost-of-capital -- the
cost internalized by the entrepreneur -- can be large for an
entrepreneur eschewing a diversified portfolio in favor of
being undiversified. The private cost is large because the
entrepreneur requires a large premium for giving up diversi-
fied holdings in favor of holding a single risky asset.
But condition (2) has limited applicability to evaluating the
cost of capital for purposes of a market valuation if markets
are competitive. By definition, a market value is the price
paid in exchange for an asset between a willing buyer and
willing seller. An undiversified seller, say, the entrepreneur
from above, will not want to sell her assets at a price that
reflects company-specific risk. This is because a diversified
bidder can always offer her a higher price than an undiversi-
fied bidder. The diversified bidder can offer the higher price
because he requires less return for bearing the risk of the
entrepreneur’s company than an undiversified bidder. Thus,
competition, or potential competition, from a diversified
bidder will again force the market compensation for company-
specific risk to be zero.
Of course, markets for assets held by undiversified investors
may not be so competitive. Diversified bidders may shy away
from small, opaque, illiquid, or assets held by undiversified
investors, preferring instead to trade only in transparent and
liquid claims securities markets of publically listed compa-
nies. The question of whether condition (2) holds then
becomes an empirical question: Do the observed returns
earned by undiversified sellers reflect company-specific risk?
While it is much harder for researchers to observe and ana-
lyze the returns earned on investments in small or privately
held assets, the existing scientific studies of private-market
returns suggests that the these markets are competitive
enough to force the CSRP to zero. For instance, Moscowitz
and Vissing-Jørgensen (2002) combine comprehensive data
on private equity holdings from the U.S. Survey of Consumer
Finances, National Income and Product Accounts, and Flow
of Fund Accounts to study the returns to entrepreneurs
investing in private businesses. They show that while these
investors hold highly undiversified portfolios and expose
themselves to significant company-specific risk, they earn a
return on private equity that is no higher than the market
return of public traded stocks.
Meanwhile, Jones and Rhodes-Kropf (2003), Kaplan and
Schoar (2005), Cochrane (2005), and Korteweg and Sorenson
(2010) study the returns to private equity investors using the
reported performance of venture capital and leveraged
buyout firms. Jones and Rhodes-Kropes (2003) and Kaplan
and Schoar (2005) show that net-of-fee returns to limited
partners in these private equity funds are comparable to
market returns to publicly traded investors. Gross-of-fee
returns to general partners of venture capital firms tend to
exceed returns on publicly traded firms, but Kaplan and
Schoar (2005) argue that this probably reflects superior
investment selection or higher systematic risk, rather than
compensation for idiosyncratic risk. In line with Kaplan and
Schoar’s conjecture, Korteweg and Sorensen (2010) show
that investments in private firms exhibit high systematic risk
and no additional reward beyond what can be explained by
systematic risk alone.
Thus, existing studies of the returns to private owners and
private equity investors suggest that markets for private
assets are competitive enough to drive CSRPs to zero.
ConclusionValuation, in practice, is a frustrating endeavor. It relies on
forecasts of future outcomes that are far from known at the
time they are made and on inputs that are often unobserva-
ble, even after the fact. Discerning the cost of capital for a
company or project is particularly elusive. Financial scholars
have a good sense for what types of risks – systematic risks –
should be compensable in the cost of capital, but are often
unsuccessful in capturing all important systematic risks into
one coherent model. This leads to understandable confusion
among practitioners and leaves room for filling in gaps left
by science with practical experience.
However, on the question of whether company-specific risks
should be incorporated into the cost of capital, economic
principles are backed by well-founded empirical investiga-
tions. Robust data, sophisticated statistical techniques, and
over forty years of published studies show consistently that
company-specific risks are not compensable in the cost of
capital. The studies show this to be true among both public
and private firms, small and large companies, and among
10 • Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us?
fsrforum • volume 13 • issue #5
»
Table 1: Summary of Recent Scholarly Empirical Studies of the Company Specific Risk Premium
This table summarizes the publication outlets, findings, and criticisms of recent empirical studies of the company-specific risk
premium (CSRP). The table includes studies on both public and private firms. Panel A lists those studies reporting evidence of a
positive CSRP. Panel B lists those studies finding no evidence of a positive CSRP.
Panel A: Studies reporting to find a positive company-specific risk premium (CSRP)
Study Publication outlet Data source Primary Finding Comments/Critiques
Goyal and Santa Clara (2003) Journal of Finance Publicly traded U.S. firms Aggregate stock market returns are higher when average company-specific risk is higher.
Mixes different weighting methods and uses a specific sample period. Bali, et al. (2005) show result dissappears using corrected weights or longer sample period.
Jones and Rhodes-Kropf (2003) Unpublished working paper Reported returns earned by private equity funds
Net returns and 'alphas' are positively correlated with company-specific risk.
Net returns are not risk adjusted; assumes a beta of 1.0 on all private investments. Korteweg and Sorensen (2010) show that VC investments tend to have betas in the range of 2.0 to 4.0 and find no evidence of a CSRP.
Malkiel and Xu (2004) Unpublished working paper Publicly traded U.S. firms Positive CSRP using firm-level regressions when sorting firms first into size and beta portfolios.
Mixes portfolio-level measure of company-specific risk with firm-level returns. Portfolio measure of company-specific risk could be capturing systematic variable related to size and beta.
Fu (2009) Journal of Financial Economics Publicly traded U.S. firms Strong evidence of a positive CSRP using a forward-looking EGARCH model of conditional company-specific risk.
Suffers from a "look-ahead" bias by using information on future volatilities to calculate current measure of risk. Guo, et al. (2010) and Fink, et al. (2010) show that once look-bias is corrected, CSRP is zero.
Cao and Xu (2010) Unpublished working paper Publicly traded U.S. firms Company-level returns are positively related to a measure of the long-run component of company-specific risk.
Finds no relation between usual measure of company-specific risk and returns. Short- and long-run decomposition likely suffers from look-ahead bias.
Panel B: Studies reporting to find no evidence of a positive company-specific risk premium (CSRP)
Study Publication outlet Data source Primary Finding Comments/Critiques
Moscowitz and Vissing-Jørgensen (2002) American Economic Review Returns to U.S. individuals holding equity in single firms.
Returns on private holdings no higher than return on aggregate public stock market returns.
Suggests that entrepreneurs take on substantial unsystematic risk for reasons other than earning proper risk-adjusted returns.
Cochrane (2005) Journal of Financial Economics Bias-corrected returns to private venture capital funds
Venture capital return performance no higher than a small publicly traded company.
More robust models of sample selection developed by Korteweg and Sorensen (2010) show that VC investment betas are much higher, and adjusted performance much lower, than shown by Cochrane (2005)
Kaplan and Schoar (2005) Journal of Finance Reported returns earned by private equity funds
Net-of-fee returns to limited partners in these private equity funds are comparable to market returns to publicly traded investors
Net returns are not risk adjusted; assumes a beta of 1.0 on all private investments. Korteweg and Sorensen (2010) show that VC investments tend to have betas in the range of 2.0 to 4.0 and find no evidence of a CSRP.
Ang et al. (2006, 2009) Journal of Finance (2006); Journal of Financial Economic (2009)
Publicly traded U.S. firms (2006); publicly traded firms in 23 markets around the world (2009).
Negative relation between one-month forward portfolio returns and portfolio measure of company-specific risk, suggesting CSRP is negative.
Daily measures of volatilty can be problematic for estimating volatility at monthly frequency. Measure of risk not contemporaneous with returns.
Bali and Cakici (2008) Journal of Financial and Quantitative Analysis
Publicly traded U.S. firms. CSRP is statistically not different from zero under a variety of different scenarios related to choice of data, weighting of the data, and the periods over which the data are calculated that.
Addresses many of the statistical and data shortcomings of earlier papers reporting to find positive or negative CSRPs.
both diversified and undiversified investors. Given the pre-
ponderance of evidence, the company-specific risk premium
should be one tool left out of the credible practitioner’s toolbox.
Given the preponderance of evidence, the company-specific risk premium should be one tool left out of the credible practitioner’s toolbox.
Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us? • 11
References on request
Notes1 The article is based on a more comprehensive analysis and synthesis of the literature con-
ducted by the authors in a current working paper, see Calvert and Smith (2011).
2 See Reilly (2008), p. 48.
3 See Butler and Pinkerton (2006, 2007 a,b).
4 For instance, see Trugman (2008).
5 The benefits to diversification do not rest on any strong assumptions about investor behavior
beyond assuming that they prefer higher returns and lower risk. Rather, the “canceling out”
that occurs from diversification results from consider the risk and return on a portfolio of
imperfectly correlated risky assets. As more assets are added to the portfolio, the riskiness of
the portfolio declines without necessarily lower the expected return on the portfolio. These
and related “portfolio theory” insights earned Harry Markowitz and William Sharpe the Nobel
Prize in Economics in 1990. For an extension introduction to portfolio theory, See, Berk and
Demarzo (2007), Chapters 10-12.
6 In their popular corporate finance textbook Berk and Demarzo (2007) characterize the reason
why a CSRP should not exist in a competitive market as follows:
If the diversifiable risk of stocks were compensated with an additional risk premium, then inves-
tors could buy the stocks, earn the additional premium, and simultaneously diversify and
eliminate the risk. By doing so, investors could earn an additional premium without taking
on additional risk. This opportunity to earn something for nothing would quickly be exploited
and eliminated. (p. 305).
7 Two exceptions are Longstaff (1989) and Lehmann (1990). Longstaff (1989) studies the cross-
sectional relation between returns and total variance by first sorting stocks into portfolios
based on market capitalization. He finds no significant relation between returns and compa-
ny-specific risk. Lehmann (1990) corrects for measurement error in market model parameter
estimates and examines estimates using individual, rather than grouped securities. Lehmann
(1990) finds a positive association between residual risk and return in some of cases, but finds
his results to be sensitive to the benchmark and methodology selected for the test.
8 For instance, see Brennan and Torous (1999), Hamilton (2000), Benartzi (2001), Meulbrook
(2001), Heaton and Lucas (2001), Hall and Murphy (2002), Jones and Rhodes-Kropf (2003),
Kerins, Smith, and Smith (2004), and McConaughy and Covrig (2007, 2009). An investor ex-
posed to scenario (1) risk will price that risk according to a “total beta” model, as discussed in
Damodaran (2006) and below in the “Inferences
12 • Company-Specific Risk Premiums and the Cost of Capital: What does the Science Tell Us?
fsrforum • volume 13 • issue #5
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Data from restricted-stock studies are used by business-valuation
analysts to estimate a discount for lack of marketability, or
DLOM, applicable to the valuation of a private company. The
intuition and standard rationale for the DLOM is that, even
after an investor is compensated for the risk associated with
holding an asset, an asset held under effective compulsion
still must be worth less than if the asset were held by choice.
This large-sample empirical study of private-placement dis-
counts avoids four common mistakes in restricted-stock
studies and finds evidence for a DLOM no greater than 5.6%.
This estimate is not statistically significantly different from
2.5%, which is the DLOM on the riskless asset as implied by
the typical yield spread between 5-year bank CDs and 5-year
U.S. Treasury securities.
Business appraisers are mostly CPAs who, in my view, have
not brought to the DLOM the skepticism typical of their pro-
fession. I covered a range of issues in my previous paper on
the DLOM,1 focusing on the problem of redundancy, and
follow up here with a large-sample private-placement study
that exploits the power of regression analysis. I find little
evidence that average discounts in private placements of
common stock are directly (i.e., reliably) related to the
restricted nature of restricted stock. In addition, I provide
historical evidence (1998-2011) regarding the DLOM on the
riskless asset.
Restricted-stock studies are the keystone of the DLOM edifice,
and provide the only data that Shannon Pratt could cite to
buttress his rejection of my well-supported finding that the
DLOM is substantially redundant to the ample discounting
for lack of size in core valuation methods.2 This study avoids
four mistakes that have afflicted restricted-stock studies.
First and foremost, it is a mistake to assume that discounts
in sales of restricted stock are due solely to restricted mar-
ketability – when discounts also occur in private placements
of free-trading shares. My data include private placements of
free-trading shares (28% of all deals) and restricted stock. It
is only the differential discount that can be attributed reliably
to SEC-imposed limits on the marketability of restricted
stock, and then, only after controlling for determinants of
discounts that are common to placements of restricted stock
and free-trading shares.
Second, the dominant feature on the private-placement
landscape has long been the high participation by OTC com-
panies (those with Pink-Sheet or OTCBB-traded shares). OTC
companies account for 41% of the 1,103 private placements
of common stock during 2004-2010 (in my data). This is
down from 82% of 88 deals during 1990-1995.3 This matters
because almost all of the largest discounts (those above 50%)
occur in deals by OTC companies. The prevalence of OTC
deals means that discounts are often calculated relative to
prices set in trading venues that are not often thought of as
efficient markets. It is a mistake to overlook the effect of OTC
status, especially insofar as such data provide the very juice
of the analysis. I use multiple regression analysis to control for
the higher average discounts seen in deals by OTC companies.
The third mistake is related to the second. It is a mistake to
overlook the change in the market price of the stock over the
several weeks before the deal. The rationale is straightforward.
Buyers may disbelieve a market price, and discount more
heavily off that market price, insofar as it has recently
increased. It turns out that the percentage change in stock
price over the 30 days before the deal closes explains private-
placement discounts better than any other explanatory
variable that I consider.
Fourth, the dispersion in discounts from one deal to the next
is wide and it may be tempting to overlook this attribute of
private-placement discounts when reaching conclusions. It
is because the dispersion is wide, however, that it is neces-
sary to address this feature of the data. I consider the “known
or potential rate of error,” which is one of the several non-exclu-
sive indicia of reliability mentioned by the Supreme Court in
Daubert.4 Because t-statistics increase with sample size,
algorithmically, statistical significance presents a low bar in
a sample as large as mine.
While my study is novel in several respects, it otherwise fol-
lows a line of scientific research that includes Wruck (1989),
Silber (1991), Hertsel and Smith (1993), Bajaj, Denis, Ferris
and Sarin (2001), Barclay, Holderness and Sheehan (2007),
and Huson, Malatesta and Parrino (2009).5
THE MISTS OF TIME The SEC has gradually deregulated post-IPO issuances of
common stock. The thresholds to qualify for the use of shelf
registration now mainly exclude OTC companies with a
public float below $75 million. Earlier, during 1992-2007, all
companies with float below $75 million had been excluded.
The minimum holding period before restricted stock can be
resold to the general public, absent registration, was reduced
from to six months in early 2008 after being reduced from
two years to one year in early 1997.
Robert Comment, MBA,
PHD, AVA, has taught
finance and business
valuation in several MBA
programs, and previously
served as the SEC’s
Deputy Chief Economist.
He testifies frequently
as an expert witness in
securities litigation.
E-mail: bobcomment@
msn.com.
A Skeptical Restricted-Stock Study
Robert Comment, MBA, PHD, AVA
»A Skeptical Restricted-Stock Study • 15
fsrforum • volume 13 • issue #5
One might imagine that the private placements most inform-
ative of the DLOM are those before 1997 when the regulatory
holding period was longest. The catch is that these deals
mostly pre-date electronic filing, which was phased in
around 1995. Information on these deals was limited to what
issuers disclosed in press releases. The press releases are
vague on the initial and subsequent registration status of
shares being sold. Due to these data limitations, it is difficult
to determine in these deals if a marketability restriction
applied for the full two-year term, or if one ever applied at all.
Moreover, these ancient data are of dubious relevance in the
modern era. For one thing, the frequency of deals has
increased ten-fold, from 15 per year during 1990-1995 to 158
per year during 2004-2010. The modern market is competitive
and buy-side competition, along with the shift in composition
away from OTC companies (with high discounts), may have
reduced discounts over time. In any event, data originating
when the regulatory restriction was most severe offer little or
no advantage over modern data.
FREE-TRADING SHARESPrivate placements of free-trading shares occur pursuant to
a shelf registration, a type available since 1982. A shelfregis-
tration differs in that it authorizes generic, future issuances
rather than one specific, immediate issuance. Being generic,
a shelfregistration filing does not include deal-specific infor-
mation. That gets disclosed in a prospectus supplement filed
later, at time of sale, which can be several years later. Finally,
while the buyers in private placements of free-trading shares
need not be accredited investors, they mostly are anyway.
The same sort of institutions and wealthy individuals that
buy restricted stock appear to be the buyers in private place-
ments of free-trading shares.
BLOCKAGE DISCOUNTSThree-quarters of all the common stock of U.S. public com-
panies is held by institutional investors, making blockage
discounts implausible as a general matter. In any event, most
private placements of common stock are sold to groups of
accredited investors assembled by private-placement agents.
It is unlikely that group members would eventually sell in
unison. They are unlikely to seek to exit their investments at
the same time by chance, and unlikely to conspire to flood
the market with coordinated sales if doing so will reduce
their sale proceeds.
Private placements are sold to a single buyer just 18% of the
time (201 of 1,103). In the extreme, when there are 10 or
more buyers, the total shares sold averages 22.1% of prior
shares outstanding while the typical block sold averages
0.9% of prior shares outstanding. Alternatively denominated,
when there are 10 or more buyers, the total shares sold typically
amounts to 201% of one month’s volume while the actual
blocks sold each typically amount to 9% of one month’s
volume. A discrepancy of this magnitude means that any cor-
relation between discounts and the overall size of the deal,
the macro-block, cannot be indicative of a blockage discount.
I nevertheless include the shares sold per deal (expressed as
a percentage of prior shares outstanding) as an explanatory
variable in my multiple regression, but not as a measure of
blockage. I see it as a measure of potential dilution. Dilution
will depend partly on how many shares are sold and partly on
the magnitude of the discount, but one cannot use the dis-
count itself to construct an explanatory variable, so I settle for
a measure of potential dilution rather than actual dilution. Also,
there may be other explanations besides blockage or dilution.
WHY REGRESSION ANALYSIS?Estimating the DLOM as a differential effect (the average dis-
count on restricted stock minus the average on free-trading
shares, after controlling for extraneous factors) is proper
because the alternative entails an assumption: that restricted
stock is sold at a discount from the prevailing market price
solely due to an artificial limit on marketability. This assump-
tion is counterfactual because discounts to market value also
are typical in private placements of free-trading shares.
One reason that multiple regression analysis is ubiquitous in
science is that the estimated coefficient for any one explanatory
variable measures the separate effect of that factor after
Most private placements of common stock are sold to groups of accredited investors.
16 • A Skeptical Restricted-Stock Study
fsrforum • volume 13 • issue #5
controlling for effects statistically attributable to the other explanatory variables included in the
analysis. Accordingly, the purpose of regression analysis in the present study is to isolate the
separate/direct effect of the regulatory restriction on the average discount in private place-
ments after controlling for various factors unrelated to the regulatory restriction. I limit my
control variables to ones of a practical nature.
MY DATAI analyze 1,103 private placements of common stock that closed over the seven-year period from
January 1, 2004 through December 30, 2010. These deals were completed by 724 different com-
panies. I found these private placements using various keyword searches of Bloomberg’s
archive of SEC filings.
The common stock sold in private placements is often packaged with warrants (a right to buy
more shares at a set price over, typically, five years). Warrant-sweetened deals are more frequent
than are stock-only deals. I follow standard practice and exclude sweetened deals. In any event,
stock-only deals are plentiful.
The full version of my paper provides a table showing attributes of the deals and the companies in
my sample. The real eye-opener here is that four-fifths of the companies report negative net
income over the last four quarters before the deal closes, with the average loss being $10.9 mil-
lion. Losses are equally frequent for the companies that sell free-trading shares and restricted
stock, but the average loss is three times greater among the companies that sell free-trading
shares ($21.0 million) compared to those that sell restricted stock ($7.0 million). It may well be
that the second-best way to identify smaller, loss-plagued companies is to screen on private
placements of common stock.
Of all deals, 5% are done by NYSE companies, 13% by Amex companies, 30% by Nasdaq Global
Market companies (regular Nasdaq), 11% by Nasdaq Capital Market companies (the junior tier)
and 41% by OTC companies. Companies that pay cash dividends comprise 6% of the sample. As
previously noted in the literature, the typical company that sells common stock in a private
placement is a comparatively small, cash-burning “growth” company.
It is conventional in private-placement studies to exclude the smallest companies, albeit indi-
rectly by excluding those with stock prices below $1 or $2 per share. In contrast, my sample
includes companies with stock prices as low as $0.10 per share (but they must trade on the day
of the close, which excludes quite a few OTC companies), and I then control for OTC status in
my regression analysis.
INCLUDED VARIABLESThe dependent variable in the regression analysis is the private-placement discount, which com-
pares the pershare deal price to the prevailing market price. In calculating the discount, I measure
the prevailing market price as the volume-weighted average price (VWAP) on the day the deal
closes. The discount is the difference between the deal and market prices expressed as a per-
centage of the market price, having a positive value when the deal price is below the market
price.
In its Institutional Investor Study in 1971, the SEC found that restricted-stock discounts were
most dependent on (1) net income, (2) sales, (3) OTC status, and (4) registration rights. My
explanatory variables are inspired by these four. I use 15 explanatory variables: five for solvency
(more or less), three for buyer disbelief, one for potential dilution, one for deals done possibly »A Skeptical Restricted-Stock Study • 17
not at arm’s length, and five to cover aspects of the regula-
tory restriction on marketability.
Ten of the 15 explanatory variables are simple indicator variables
(sometimes called dummy variables). An indicator variable is
a construct that equals one when a given condition prevails
and zero otherwise. The estimated coefficient on an indicator
variable is an average for those observations coded one, albeit
an average after having controlled for the effects of all the
other explanatory variables. The included explanatory variables,
and brief rationales, are as follows:
SolvencyLow solvency may weaken a company’s bargaining position
when negotiating a sale price. These variables include:
• netincome(mostlylosses)overthelastfourquartersbefore
the sale, expressed as a percentage of market capitalization;
• anindicatorvariablefornegativenetincome;
• Salesrevenueoverthelastfourquartersbeforethesale,
expressed as a percentage of market capitalization;
• anindicatorvariableforzerorevenue;
• holdings of cash, marketable securities and shortterm
investments last reported before the sale, expressed as a
percentage of market capitalization.
Buyer DisbeliefThe sophisticated buyers in private placements may demand
a discount from the trading price out of disbelief in that
benchmark price. These variables include:
• anindicatorvariableforOTCcompanies;
• anindicatorvariableforNasdaqCapitalMarketcompanies
(the junior tier of Nasdaq and the next closest category to
OTC status);
• thepercentagechangeinthemarketpriceoverthe30-cal-
endar-day period ended the day of the close, measuring the
market price by the VWAP for the day.
Potential for DilutionSee the section above entitled “Blockage Discounts.” This
variable is:
• thetotalnumberofsharessoldexpressedasapercentage
of pre-sale shares outstanding.
Possibly Not at Arm’s LengthI exclude deals where the buyer is an affiliate of the company,
insofar as that is disclosed, but disclosure of ulterior motives
is incomplete. Also, the company might reveal positive inside
information to select buyers, perhaps inappropriately. This
variable is:
• anindicatorvariablefordealssoldtoasinglebuyer.
Restricted MarketabilityI measure every aspect of the marketability restriction I can.
These variables include:
• anindicatorvariableforwhetherthesharesarerestricted
stock at the outset;
• anindicatorvariableforwhetherbuyersreceiveregistration
rights at the outset;
• anindicatorvariableforrestrictedstockthatendsupcon-
verting into free-trading shares within three months (1 to
90 days);
• anindicatorvariableforrestrictedstockthatendsupcon-
verting into free-trading shares in four to six months (91
to 183 days);
• anindicatorvariableforrestrictedstockthatendsupcon-
verting into free-trading shares in seven to twelve months
(184 to 365 days).
REGRESSION RESULTSThe following table provides the results of three formulations
of multiple regression analysis. The estimated coefficients for
most of the control variables are statistically significant, as
expected in a sample as large as this. Statistical significance
is reported in the table as a P-value that tells you whether the
estimated coefficient is significantly different from zero in a
sample of this size. It is conventional to accept a coefficient as
being significantly different from zero if the associated
P-value is at or below 0.05 or 0.10, as these corresponds to
confidence levels of 95% and 90% (one minus the P-value,
expressed as a percent).
I discuss the estimated coefficients of my control variables in
my full paper. Notably, the coefficient for holdings of cash
and shortterm investments is negative, which is intuitive.
The more cash on hand, the lower the discount. More cash
on hand implies greater bargaining power, as the company is
less desperate for funding to continue its operations. One
reward for better planning and more-deliberate fundraising
is a lower discount. Statistically, the most significant explan-
atory variable (the one with the highest t-statistic) is the per-
centage change in the market price during the 30 calendar
days before the closing date of the deal.
18 • A Skeptical Restricted-Stock Study
fsrforum • volume 13 • issue #5
Multiple Regression AnalysisDependent Variable is Percentage Private-Placement Discount
Regression 1 Regression 2 Regression 3
Explanatory Variable: Coefficient P-value Coefficient P-value Coefficient P-value
Intercept 6.2806 0.000 4.0754 0.017 3.9382 0.021
Net Income as a % of Mkt. Cap. 0.0455 0.000 0.0449 0.000 0.0444 0.000
Indicator for Net Income < 0 5.3568 0.001 5.6004 0.000 5.6984 0.000
Revenue as a % of Mkt. Cap. -0.0021 0.339 -0.0025 0.271 -0.0025 0.273
Indicator for Revenue = 0 4.9152 0.001 4.9914 0.001 5.1861 0.001
Cash & STI as a % of Mkt. Cap. -0.1380 0.000 -0.1298 0.000 -0.1289 0.000
Indicator for OTC 13.9617 0.000 11.5748 0.000 11.8416 0.000
Indicator for Junior Tier of Nasdaq 2.5227 0.188 2.1450 0.263 2.2836 0.235
% Change in Market Price over 30 Days 0.1072 0.000 0.1054 0.000 0.1048 0.000
Total Shares Sold as a % of Prior Shares 0.0942 0.000 0.0934 0.000 0.0904 0.000
Indicator for One Buyer -8.8342 0.000 -9.2387 0.000 -9.1470 0.000
Indicator for Restricted Stock 1.85 1.22 3.70 0.24 65.40 65.40
Sold without Registration Rights 5.2382 0.006
Indicator for Restricted Stock 1.85 1.22 3.70 0.24 65.40 65.40
Sold with Registration Rights 3.4639 0.021
Indicator for Free Trading in 9-90 Days 3.2318 0.066
Indicator for Free Trading in 91-183 Days 3.5511 0.040 62.20
Indicator for Free Trading in 184-365 Days 5.5692 0.004 65.40
R Square 0.270 0.276 0.276
Adjusted R Square 0.264 0.268 0.268
Standard Error 18.96 18.90 18.91
Number of Observations 1,103 1,103 1,103
CD-Treasury Yield Spreads,Monthly from June 1998 through June 2011
In addition to all of the control variables included in Regression
1, the base regression, Regression 2 includes the indicator
variable for restricted stock sold without registration rights,
along with the companion indicator variable for restricted
stock sold with registration rights. Because registration rights
serve to mitigate the effects of the regulatory restriction, the
estimated coefficient on the first of these two indicator vari-
ables (without registration rights) should reflect the effect of
the regulatory restriction on discounts more fully than will
the second indicator variable (with registration rights).
After controlling for determinants of discounts unrelated to
the regulatory restriction, the portion of the typical discount
that can be tied directly to the regulatory restriction in its
most severe form is 5.2%, which is significantly different
from zero but much smaller than the double-digit DLOMs
commonly applied in business appraisals. As for the companion
indicator variable, when the regulatory restriction is miti-
gated through a grant of registration rights that could serve
to accelerate the conversion of the restricted stock into free-
trading shares, discounts are 3.5% higher instead of 5.2%
higher.
In Regression 3, the regulatory restriction is represented by
the realized delay before free-trading status obtains. This
information is not available to participants at the time of the
deal, but these data may proxy for the expectations of the par-
ticipants at the time of the deal. Discounts are 3.2% higher
when conversion occurs within 90 days, 3.6% higher when
conversion occurs within 91 to 183 days, and 5.6% higher in
the remaining cases where restricted stock ends up converting
into free-trading shares 184 to 365 days following the close.
The last two of these estimates of the DLOM is significantly
different from zero. Accordingly, discounts depend some, but
not much, on the realized delay before the regulatory restriction
is lifted.
As I explain below, data on the CD-Treasury yield spread
imply a DLOM on the riskless asset of 2.5%. Of the two coef-
ficient estimates in Regression 2 that relate to the regulatory
restriction, even the higher of the two estimates, 5.2%, is not
statistically significantly different from 2.5% (t-statistic of
1.44, P-value of 0.150). Likewise, the highest of the three
estimates in Regression 3 is 5.6% and this is not statistically
significantly different from 2.5% (t-statistic of 1.61, P-value
of 0.110).
Finally, and transcendently, one can ask if the inclusion of
the several explanatory variables related to the regulatory
More cash on hand implies greater bargaining power, as the company is less desperate for funding to continue its operations.
»A Skeptical Restricted-Stock Study • 19
restriction adds to the overall explanatory power of the mul-
tiple regression analysis. The relevance of additional explana-
tory variables is established by comparing the adjusted
R-square statistics of two alternative models. R-square is the
fraction of the total variance in the dependent variable that is
explained in a given regression. The adjusted R-square statistic
differs from the raw R-square statistic in that the adjusted
R-square increases only if the added explanatory variables
improve the model more than would be expected by chance.
The adjusted R-square statistics for Regression 2 and Regres-
sion 3 are both 0.268, which is very close to the adjusted
R-square of 0.264 for Regression 1, the base model with no
explanatory variables related to the regulatory restriction.
That these adjusted R-square statistics are very close means
that the several explanatory variables related to the regulatory
restriction, considered as a group, add very little to the
explanatory power of the model. Accordingly, data on discounts
in private placements of common stock, insofar as it relates
to the size of the DLOM, do not imply a DLOM different from
that on the riskless asset, or 2.5%.
DLOM ON THE RISKLESS ASSETThere is one measure of the DLOM – that on the riskless asset
– that can be calculated directly (without need of multiple
regression analysis) and used reliably without introducing
redundancy. The DLOM on the riskless asset can be calculated
from the difference in yields between a 5-year bank certificate
of deposit (illiquid due to penalties for early with-drawal)
versus a 5-year U.S. treasury security (highly liquid). Here,
the requisite calculations transcend mere arithmetic only in
that one must use an average of the yields on CDs offered by
some sample of banks.
Data on yields offered on CDs by various banks are compiled
by bankrate.com, which reports averages that are available
from Bloomberg. Bloomberg also offers a screen for a yield
curve based on “U.S. Treasury Actives” from which the yield
on a hypothetical security of exactly five years maturity can
be obtained, as of any given date, via interpolation.
The CD-Treasury yield spread equals the CD yield minus the
Treasury yield. This yield spread is shown in my scatterplot,
which compares the yields on 5-year bank CDs versus 5-year
U.S. Treasuries as of the end of each month for the past 13
years. A normal, positive yield spread (one that compensates
for restricted marketability) will plot above the diagonal. The
plot shows that CD yields tend to track Treasury yields less
closely when Treasury yields are at extreme levels (high or
low, but mostly high), and shows that the CD-Treasury
spread is nearly always positive when the Treasury yield is
below 5%.
Mainly, the CD-Treasury spread is just small. It averages an
implausible -0.053% per year in the 26 months when the
yield on 5-year Treasuries ex-ceeded 5.0%, but still averages
only 0.49% in the other 131 months. My takeaway from these
data is that a typical CD-Treasury spread is no greater than
0.5%.
A CD-Treasury yield spread of 0.5% could be included as an
illiquidity premium in an implementation of the Ibbotson
buildup method of finding an annual discount rate for use in
a core valuation analysis (e.g., a discounted cash flow or cap-
italized earnings method). Equivalently, one can convert the
CD-Treasury yield spread into a DLOM applied supplemen-
tally to the results of a core valuation methodology. An initial
investment of $97,500 in the average 5-year CD would result
in approximately the same ending balance (including rein-
vested interest) after five years as would an initial investment
of $100,000 in a 5-year Treasury security. So, a CD-Treasury
yield spread of 0.5% implies a supplemental, non-redundant
illiquidity discount, or DLOM, of 2.5% ($97,500 being 2.5%
lower than $100,000).
The fact that the DLOM on the riskless asset approximates
2.5% leads inescapably to the conclusion that any discounting
for lack of marketability beyond 2.5% constitutes a second
round of discounting for the risk associated with holding an
asset over time. That a DLOM in excess of 2.5% is a second
round of discounting for risk frames the reliability issue.
How confident can one be that a second round of discounting
is not redundant to the first? The requisite confidence cannot
be found in restricted-stock studies.
CONCLUSIONThe purpose of this study has been to determine if the data
on the discounts in private placements of restricted stock
imply a DLOM different from the DLOM on the riskless asset.
This is a skeptical analysis, by which I mean an analysis not
configured to document what is presumed. Specifically, this
study allocates to the DLOM only that portion of the
restricted-stock discount that can be tied to restricted mar-
ketability directly. No portion is allocated to the DLOM by
default or presumption. This is the only approach that can
produce a result that is reliable. My skeptical, scientific
The advocates of double-digit DLOMs seem to believe they enjoy a king-of-the-hill status that empowers them to brush aside challenging evidence.
20 • A Skeptical Restricted-Stock Study
fsrforum • volume 13 • issue #5
approach yields estimates of the DLOM no larger than 5.2% or 5.6%, which is consistent with
the latest findings by others (a little higher, actually). My estimates are not statistically signifi-
cantly different from the DLOM on the riskless asset of approximately 2.5%.
The advocates of double-digit DLOMs seem to believe they enjoy a king-of-the-hill status that
empowers them to brush aside challenging evidence. In the Supreme Court’s Daubert decision
governing the admissibility of expert opinion6, however, there is no grandfather clause that per-
mits continued reliance on methods that are seasoned but unreliable. In Daubert, the Supreme
Court demoted general acceptance from being the sole requirement for the admissibility of
expert opinion, as it had been under Frye7, to one of several non-exclusive indicia of the ultimate
goal of reliability. Moreover, although some would prefer to contemplate general acceptance
among clinicians, the acceptability contemplated by the Supreme Court is that within the
“relevant scientific community.”
Daubert requires reliability and fealty to the scientific method. In its follow-on decision in
Kuhmo Tire8, the Supreme Court told the clinician critics of its Daubert ruling, in effect, to get
with the program. Yet, two decades after Karen Wruck’s study, proponents of large DLOMs con-
tinue to rely on purported evidence that depends entirely on a counterfactual assumption: that
the regulatory restriction is the sole cause of the discounts reported in restricted-stock studies.
Absent this assumption and its consequences, little or none of the average discount can be tied,
directly and reliably, to the regulatory holding period for restricted stock.
Private-company status may merit a discount below what core valuation methods would indi-
cate. Private-company status may even merit a double-digit discount, but that merited large
discount is not a discount for lack of marketability. The DLOM is not reliably different from
2.5%.
Notes1 Robert Comment, “Business Valuation, DLOM and Daubert: The Issue of Redundancy,” Business Valuation Review, 29 (2010).
2 See the section entitled “Comment Claims DLOMs ‘Re-dundant’” in Shannon Pratt, “In Defense of Discounts for Lack of Marketability,” Business
Valuation Review, 29 (2010).
3 See Table 4 of Bajaj, Denis, Ferris and Sarin, “Firm Value and Marketability Discounts,” Journal of Corporation Law 27 (2001).
4 Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
5 Wruck, “Equity Ownership Concentration and Firm Value,” Journal of Financial Economics 23 (1989); Silber, “Discounts on Restricted Stock: The
Impact of Illiquidity on Stock Prices,” Financial Analysts Journal 47 (1991); Hertsel and Smith, “Market Discounts and Shareholder Gains For
Placing Equity Privately,” Journal of Finance 48 (1993); Bajaj, Denis, Ferris and Sarin, “Firm Value and Marketability Discounts,” Journal of Corpo-
ration Law 27 (2001); Barclay, Holderness and Sheehan, “Private Place-ments and Managerial Entrenchment,” Journal of Corpo-rate Finance 13
(2007); and Huson, Malatesta and Par-rino, “The Decline in the Cost of Private Placements,” working paper available at SSRN.com (June 2009).
6 Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
7 Frye v. United States, 293 F. 1013 (D.C. Cir. 1923),
8 Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).
A Skeptical Restricted-Stock Study • 21
Currency Valuation and Purchasing Power Parity
Jamal Ibrahim Haidar1
April, 2011
fsrforum • volume 13 • issue #5
22 • Currency Valuation and Purchasing Power Parity
1. Introduction The analytical framework of currency valuation is an intel-
lectual challenge and of influence to economic policy, smooth
functioning of financial markets, and financial management
of many international companies. The Economist magazine
argues that the Big Mac Index (BMI) based on the price of a
Big Mac hamburger across the world can provide “true value”
of currencies.
The purchasing power parity (PPP) theory postulates that
national price levels should be equal when expressed in a
common currency. Since the real exchange rate is the nomi-
nal exchange rate adjusted for relative national price levels,
variations in the real exchange rate represent deviations
from PPP. It has become something of a stylized fact that the
PPP does not hold continuously. British prices increased rel-
ative to those in the US over the past 30 years, while those of
Japan decreased. According to PPP theory, the British pound
should have depreciated (an increase in the pound cost of the
dollar), and the Japanese yen should have appreciated. This is
what in fact happened. Despite deviations in the exchange
rate from price ratios, there is a distinct tendency for these
ratios to act as anchors, for exchange rates. Thus, exchange
rate reverts to the price ratio, which can be considered the
“true value” of the currency.
In 1986, The Economist magazine created a tool for making
PPP comparisons. This tool uses the price of a Big Mac ham-
burger at home and abroad as the price ratio that reflects the
“true value” of the currency. This ratio represents the BMI; it
is the nucleus of “burgernomics”. The BMI gives a signal
about under-valuation and over-valuation of currencies, rela-
tive to the actual exchange rate. The PPP school of thought
is among the oldest research areas in international finance.
The PPP stands as a general form of the law of one price in
the geographical arbitrage presence for the same goods at
different location. The PPP holds only within strict circum-
stances – i.e. lack of central bank interventions, trade restric-
tions, transaction costs, and taxes. A reference to PPP helps
determine whether foreign exchange market precisely prices
a currency because a currency, typically, revert to its PPP
value over time. The BMI currency pricing model is well
embedded in the PPP theory. It is a case of interaction
between financial journalism, basic economic research, and
foreign exchange markets.
This paper uses the occasion of the 25th anniversary of the
introduction of the Big Mac Index to provide a broad evalua-
tion of its workings and performance. While the BMI is not
perfect, it provides hints about the operation of foreign
exchange markets. Part 2 provides a literature review about
“Burgernomics”, presents evidence about the BMI, and sum-
marizes the PPP theory debate. Part 3 discusses a set of BMI
methodological limitations and clarifies the BMI bias. Part 4
concludes.
2. Evidence to dateThe literature on PPP is large and growing. Froot and Rogoff
(1995), Lan and Ong (2003), Rogoff (1996), Sarno and Taylor
(2002), Taylor and Taylor (2004) and Taylor (2006) are a
subset of available literature reviews on the matter. Click
(1996), Ong (1997) and Pakko and Pollard (1996) are among
the early contributors to academic research on the BMI while
more recent papers include Chen et al. (2007) and Clements
et al. (2010). Empirically, studies found heterogeneous results
while testing PPP. Frankel (1979) studied the correlation
between exchange rates and inflation (proxied by CPI and
then by WPI)2 in 1920s, finding PPP-supportive results in
hyperinflation economies. However, using same inflation
indicators, the same author, among others,3 rejects PPP for
developed countries during 1970s. Nonetheless, inflation
and exchange rate nonstationarity invalidates these findings
by showing the shortcomes of conventional testing methods.
Meanwhile, more recent research4 rejected PPP validity (i.e.
real exchange rate mean reversion) by utilizing cross-country
datasets while Frankel and Rose (1996) empirically validated
PPP existence.
The above studies, which use CPI or WPI, have at least two
shortcomings. First, non-tradable goods affect CPI and WPI
relative usage across countries. Second, regardless of
whether the law of one price holds in a certain market for a
specific commodity, CPIs and WPIs behave differently when
consumption bundles are not identical, leading to PPP tests
biased outcomes. Hence, these price indices can lead to
heterogeneous results while testing PPP validity. Recent
studies have shifted their attention to using another price
index as a study target. Cumby (1996) used The Economist's
BMI, given its uniform composition feature as the Big Mac
ingredients are identical across countries, to assess PPP. The
use of the Big Mac decreases the estimation bias given it
meets the “identical good” requirement in the law of one
price testing process. However, it does not meet all the
requirements of the law of one price – i.e. barriers to trade,
wage rate, taxes, and productivity differentials.
3. Methodological limitations of the BMI
3.1 Demand variabilityThe demand for fast food varies across countries. For
instance, the North American relationship with the Big Mac
is much more ingrained into culture then it is in Asian cul-
tures. For this reason, a direct comparison using Big Mac
Index (BMI) has some problems. First, food regulations differ
across countries. For example, Switzerland and the Euro
area have much more strict food regulation laws (Switzerland
in particular) than United States. This fact means the cost of
"better" beef or other parts of a Big Mac is higher in the Euro
area. Second, there is the social perception and price differential »
The North American relationship with the Big Mac is much more ingrained into culture then it is in Asian cultures.
Currency Valuation and Purchasing Power Parity • 23
of McDonalds in the different countries. In Switzerland and
much of Europe, McDonalds is more of a "nice" place. It is
not surprising for McDonalds in Europe to have multiple
stories and in Switzerland there are video game systems
and lounges. In Ukraine, one of the places to meet and relax
is McDonalds. This matter means that, in general, they are
located in better places and have higher rent payments in
Europe. Also, richer people visit the McDonalds in Switzer-
land and the Euro area and will continue to pay for such
goods despite the price. In the United States, however,
McDonalds is typically a cheaper place to eat and restau-
rants would lose a lot more money by increasing prices
than European McDonalds’. With variations like this, the
BMI perpetuates a false idea that a critical analyst can dis-
cover anything at all about purchase power parity by com-
paring hamburgers.
3.2 Product comparabilityThe theory of purchasing-power parity (PPP), the notion that
a dollar should buy the same amount in all countries, implies
that in the long run, the exchange rate between two countries
should move towards the rate that equalizes the prices of an
identical basket of goods and services in each country. How-
ever, the United States, along with most developed economies,
subsidize meat, bread (which is made of wheat), lettuce,
tomato, eggs, potatoes, and all farm products in a Big Mac
burger. Also, these countries exercise protectionism on those
products as well as adopt a mercantilist approach in the
international market. Thus, how can a Big Mac be a comparable
item? For any product to be useful on that purpose, it should
be freely-tradable between countries, with no country subsi-
dizing or taxing it more than another country. Therefore, the
Big Mac is less appropriate to compare the prices since it
would be cheaper in countries who subsidize farm products
- and it may lead to a distorted comparison.
3.3 Exchange rate predictabilityA “weak” currency, despite its appeal to exporters and politi-
cians, is no free lunch. But it can provide a cheap one. In
China, for example, a McDonald's Big Mac costs just 14.5
Yuan on average in Beijing and Shenzhen, the equivalent of
$2.18 at market exchange rates. In United States, in contrast,
the same burger costs, on average, $3.71. A difference of this
significance makes China's Yuan one of the most undervalued
currencies in the most recent Big Mac index, leading to cur-
rency misalignments. Since the BMI is based on the idea of
purchasing-power parity, and 14.5 Yuan can buy as much
burger as $3.71, a Yuan should be worth $0.26 on the foreign-
exchange market. In fact, it costs just $0.15, suggesting that
it is undervalued by about 40%. In Brazil a Big Mac costs the
equivalent of $5.26, implying that the real is overvalued by
42%. The index also suggests that the euro is overvalued by
about 29%. And the Swiss franc is the most expensive cur-
rency, according to the BMI list. The Japanese are so far the
only rich country to intervene directly in foreign exchange
markets to weaken their currency. But according to BMI, the
yen is only 5% overvalued.
How can The Economist justify this misalignment? It can
rely not on Big Macs, but on three less digestible approaches.
First, it can calculate the real exchange rate that would
steadily bring a country's current-account balance (equivalent
to the trade balance plus a few other things) into line with a
“norm” based on the country's growth, income per person,
demography and budget balance. Second, it can ignore current-
account balances and instead calculate a direct statistical
relationship between the real exchange rate and things like a
country's terms of trade (the price of its exports compared
with its imports), its productivity and its foreign assets and
liabilities. The strength of Brazil's currency, for example,
may partly reflect the high price of exports such as soya
beans. Third, it can also calculate the exchange rate that
would stabilize the country's foreign assets and liabilities at a
reasonable level. If, for example, a country runs sizeable
trade surpluses, resulting in a rapid build-up of foreign
assets, it probably has an undervalued exchange rate. Indeed,
the raw index did a poor job of predicting exchange rates:
undervalued currencies remain too cheap and overvalued
currencies remain too expensive. And, such misalignments
are remarkably persistent. They give a signal of a systematic
bias showing that the BMI may itself be undervalued.
3.4 Elements non-tradabilityThe Big Mac Index does have other shortcomings. A Big
Mac's price reflects more than just the cost of bread and meat
and vegetables. It also reflects non-tradable elements - such
as rent and labor. For that reason, the Big Mac Index probably
is best when comparing countries at roughly the same stage
of development. In any case, there is no theoretical reason
why prices of non-tradable goods and services should be
24 • Currency Valuation and Purchasing Power Parity
fsrforum • volume 13 • issue #5
equal in different countries. This fact explains why PPPs are
different from market exchange. The BMI is an interesting
way to get a snapshot of comparative countries and their
exchange rates. However, domestic prices (inflation) and the
local domestic economy also play a role in determining the
prices.
In the absence of trade barriers, dollar price of a certain good
should be identical across countries, according to the PPP
theory. Given the price of a Big Mac captures more than the
(tradable) components cost – i.e. restaurant space lease,
heating and cooling utilities, electricity costs, and wages –
the price of the good would be expectedly different across
countries. These are non-tradable goods examples. For
instance, the location of the property cannot be traded
although the property itself can be traded and transferred
between owners. Also, the use of labor is non-tradable goods
given labor restrictions to move across borders to benefit
from wage differentials. Thus, although the price of a restau-
rant rent space is lower in Sofia than in Paris, it would not be
feasible to do so if the purpose is to serve meals in Paris. Rent
and utilities contribute to the cost (and price) of a Big Mac,
causing deviations from PPP by reflecting cost differences
across countries. Non-tradable goods represent 94 percent of
the Big Mac price5. The Big Mac provides evidence about why
systematic deviations from PPP exist.
The next section considers a key PPP failure explanation: the
existence of barriers to trade. The PPP does not hold, at mini-
mum in the absolute terms, partly because of high cost of
trading goods across borders. The limitations of international
movement of goods include tariffs, export taxes, transporta-
tion costs, and other government-imposed trade barriers,
which contribute to price differentials.
3.5 Transportation costsAlthough the cost of transporting corn oil needed for the Big
Mac may not be high, transporting perishable components
such as beef, cheese, and lettuce is more costly. Thus, Trans-
portation costs may drive price differential for same good
across markets. In 2002, a Big Mac cost $2.38 in the euro
area, 11 cents less than the price in the United States.
Although such price differential may violate PPP, Big Macs
(or Big Mac components) transportation across borders may
not necessarily occur. In theory, trade may occur, in this
case, conditional on whether the Big Mac transportation cost
is less than 11 cents. Hence, one might expect absolute PPP
to hold only approximately, with prices diverging within a
range determined by the transport costs6.
3.6 Trade restrictionsUsing tariffs while practicing protectionism, countries impose
import restrictions, for instance, on farm products to protect
certain industries. The presence of tariffs on imported goods
and import quotas constitutes another significant factor of
trade restrictions. Cassel (1921) studied the effects of trade
restrictions, stating, “If trade between two countries is more
hampered in one direction than in the other, the value of the
money of the country whose export is relatively more
restricted will fall, in the other country, beneath the purchasing
power parity.” The author noted that export and import
restrictions have opposite effects on PPP. In monetary terms,
on a PPP basis, the economies with fewer restrictions on
imports will have relatively undervalued currencies. In simpler
language, the BMI would be informative on which economies
impose more restrictions on agricultural products trade,
assuming no other PPP deviation drivers, compared to
United States. For instance, among the countries that
imposed high import tariffs on beef during the BMI life are
Korea and Japan. Beef imports to Japan, until 1991, were »
In the absence of trade barriers, dollar price of a certain good should be identical across countries, according to the PPP theory.
Currency Valuation and Purchasing Power Parity • 25
subject to quotas and tariffs. In addition, tariffication came
into place in Japan during 1991 and in Korea during 1995.
On a related side, Korea imposed a 30 percent tariff on beef
imports, for 5 years up to 1994, along with other trade barriers.
It cancelled the import quote and set the tariff rate at 41% in
2001, allowing it to decrease to 40% by 2004. A key driver of
the beef price differential between Japan and Korea, and
other countries, in this case, is factored by such trade barriers,
which provide partial reasoning, as well, to the Japanese yen
and the Korean won overvaluation against the dollar until
late 1990s. However, the United States also restricts the
volume of beef imports from all countries apart from Canada
and Mexico . In April 2002, McDonald's began buying some
imported beef from Australia and New Zealand for its U.S.
operations. The quota, however, limits the extent to which
McDonald's can use imported beef to offset hamburger price
pressures. In addition, the higher barriers to trade in beef in
the United States may partly explain why the U.S. dollar has
been consistently overvalued relative to the Australian and
New Zealand dollars. In a nutshell, compared to United
States, economies with less trade restrictions would be
expected to be associated with undervalued currencies.
3.7 TaxesThe existence of different taxation schemes across countries
contributes to PPP deviations. The Economist BMI uses sales
and VAT (value added taxes) tax-inclusive prices. Thus, ceteris
peribus, higher taxes would be associated with overvalued
currencies on the BMI. Simultaneously, tax adjustments
would lead to BMI parities shifts. For example, in 1991
Canada imposed the Goods and Services Tax, a national 7
percent sales tax. Between 1990 and 1991, the price of a Big
Mac rose from C$2.19 to C$2.35. As a result, the Canadian
dollar moved from being undervalued by 14 percent against
the U.S. dollar to being undervalued by only 9 percent. It
would be misleading, however, to say that the imposition of
this new tax brought United States and Canada closer to PPP.
3.8 Productivity differentialsThe BMI and other price indices include non-tradables. Sam-
uelson (1964) and Balassa (1964) proved that non-traded
goods systematically influence PPP deviations due to produc-
tivity differences across countries, industries, and sectors.
They also showed that low-income countries will have under-
valued currencies compared to high-income countries,
assuming that economies with higher GDP per capita levels
reflect, to a certain extent, higher labor productivity.
Moreover, given competition for workers in each of non-
traded and traded goods sectors, wages are higher in high
income economies, which are associated with more labor
productivity in traded goods sectors. Wages in the service
sector are lower in low income economies, leading to lower
prices in low income economies. The, regardless of whether
prices of traded goods are identical across countries, lower
service prices transmits to lower price levels in low income
economies. In different terms, the currencies of low income
economies would appear undervalued compared to curren-
cies of high income economies. Turning to Big Macs, it is
unlikely that there are large differences in the productivity of
workers cooking burgers regardless of the country of loca-
tion of the McDonald's. There are, however, large differences
in the wages earned by these workers. This difference in wage
costs may partly explain why the yuan and the zloty have
been consistently undervalued against the dollar as meas-
ured by BMI. In fact, according to the Balassa-Samuelson
theory, holding all other things constant, the dollar should
be overvalued against the currencies of low income countries.
3.9 Government expenditures and current account deficitsDifferences in government expenditures across economies
may lead to relative prices deviations from exchange rate.
Governments spend less on traded goods than does the pri-
vate sector (households and businesses). When government
spending, for instance, in the United States decreased com-
pared to government spending in other countries, the price
In fact, the dollar should be overvalued against the currencies of low income countries.
26 • Currency Valuation and Purchasing Power Parity
fsrforum • volume 13 • issue #5
of non-traded goods in the United States will decrease as will
the overall price level. If PPP held prior to this expenditures
decline, the United States currency will be undervalued rela-
tive to its PPP level. Another role for non-traded goods in
explaining deviations from PPP comes through the current
account. Krugman (1990) argued that, as a country runs a
current account deficit, its spending on traded goods
increases relative to other countries. This argument results
in a decline in the relative price of non-tradable goods in the
deficit country. Thus, if PPP had held prior to the current
account deficit, the country's currency would then be under-
valued.
3.10 Pricing to marketFirms can optimize profits by charging different prices
across countries when they are capable of pricing to market
depending on product demand elasticity. When demand of a
good is inelastic (elastic), prices and sales revenues are posi-
tively (negatively) associated. At the same time, firms that
price to market across countries or markets may limit
exchange rate pass-through, the extent to which changes in
the exchange rate result in changes in import prices.
When imports prices do not change exactly according to for-
eign currency valuation patterns, then exchange rate pass-
through is incomplete, leading to a price differential between
domestic and foreign markets. In order to sustain relative
sales and profit margin levels when currency value changes,
a firm may control pass-through in markets where demand is
relatively elastic. Certain factors shape firms ability to price
to market - i.e. warranty restrictions, the resale probability
across markets, business regulations, safety standards,
wholesalers authorizations, and pollution criteria. In the
case of the Big Mac sandwich, obviously, unlike its ingredients,
it is not subject to resale across markets. While ingredients
can be purchased to create a competing sandwich, in many
countries there are few substitutes to Big Mac sandwich,
unlike the case in United States. Thus, it is reasonable to
conclude that the Big Mac is not all about the ingredients.
Other factors, including people's interests, shape Big Mac
demand curve - and such factors shape also the pricing-to-
market strategies. For instance, while young Koreans perceive
McDonald's as a fancy place to hang out at, their peers in
United States perceive it as no more than a low priced fast-
food destination.
4. ConclusionThe Economist magazine has been publishing the Big Mac
Index for the last quarter a century. The purpose of the indi-
cator, according to The Economist, is to show "real valuation"
of currencies, mainly by assuming PPP theory holds. This
paper shows why the BMI does poorly as a valuation tool as
well as a forecasting mechanism. It presents various angles
of the PPP theory and highlights how each of them reduces
the effectivity of one-product currency valuations indicators
such as the BMI. Various studies assessed the validity of PPP
theory by using different inflation measures across countries.
This paper adds to the literature by showing, using PPP
theory framework, why the The Economist's BMI currency
valuation indicator should be perceived with caution, by
highlighting its characteristics from tradable commodities
and non-tradable service components. It clarifies that the
BMI can actually be perceived as a good example of how,
when, and why the PPP does not hold. Prices differ across
countries for reasons not related to the value of currency.
For instance, even the price of one product (i.e. Big Mac
sandwich) is not constant within the same country (i.e.
United States). In this case, the BMI says that the value of
dollar, compared to other countries, is not the same across
two differnt areas in the United States. This observation is
hard to digest as a credible currency valuation mechanism.
Future research can look further at the contributions of
country borders tp PPP deviations.
References on request
Notes1 World Bank, International Finance Corporation.
2 The study considered PPP valid when the regression coefficient is 1.
3 Frenkel (1981), Lehman (1983), and Isard (1977)
4 O'Connell (1998), Wu and Chen (1999) and Pedroni (2004)
5 Ong (1997)
6 Hummels (2001) estimates that transportation costs add 7 percent to the price of United States
imports of meat, 6 percent to the import price of dairy products, and 16 percent to the import
price of vegetables.
7 Tariffication is an effort to convert existing agricultural non-tariff barriers to trade (NTBs) into
bound tariffs and to reduce these tariffs over time. A bound tariff is one which has a "ceiling"
beyond which it cannot be increased.
8 Imports beyond the quota limit face a 26.4 percent tariff rate.
Currency Valuation and Purchasing Power Parity • 27
W W W.GA A AN.NU© 2011 KPMG N.V., alle rechten voorbehouden.
Marleen van Dijsseldonk, 25 jaarJunior adviseur KPMG Advisory
“Onderweg naar een opdracht bij een klant in #Barcelona. Weekendje shoppen eraan vastgeplakt met vriendin daar.”
Voor 24/7 updates over werken bij Audit of Advisory, check de KPMG-bloggers op www.gaaan.nu
-04379_420x297mm_Blog_Schiphol_OF.indd 1 20-06-2011 15:38:43
W W W.GA A AN.NU© 2011 KPMG N.V., alle rechten voorbehouden.
Marleen van Dijsseldonk, 25 jaarJunior adviseur KPMG Advisory
“Onderweg naar een opdracht bij een klant in #Barcelona. Weekendje shoppen eraan vastgeplakt met vriendin daar.”
Voor 24/7 updates over werken bij Audit of Advisory, check de KPMG-bloggers op www.gaaan.nu
-04379_420x297mm_Blog_Schiphol_OF.indd 1 20-06-2011 15:38:43
Interview D. Zane HurstValuation: The vision of an expert
By Bart Lips (July 18, 2011)
First, your job at Training The Street is about providing professional financial training. Why did you decide to join a financial training provider, instead of continuing your career at an investment bank?Prior to joining Training the Street, I had been giving consideration to a change in career and
the catalyst that bought it about was merger between Bank of America and Merrill Lynch. I
have always had a passion for teaching and found the role very rewarding when working for a
previous employer. Blending both teaching and corporate finance skills, two disciplines I am
passionate about, was a great combination. The Training The Street opportunity happened by
chance as they were searching for a London based instructor to help them build out their European
franchise. Since joining the firm it has been very rewarding and it has placed me in a leadership
role where I am responsible for growing and building a business.
It is sometimes argued that Mergers and Acquisitions doesn’t create additional value to a company and is only good for the shareholder. What is your opinion about this statement? Depends on the success of the merger or acquisition. If successful, ultimately the shareholders
will be rewarded in the form of capital appreciation or higher dividends. Unfortunately, value
creation is not always immediate so it does require patience on the part of shareholders. Just as
Zane joined Training The Street with more than 10 years of investment banking experience. Since joining the firm’s London office, he has led both full time and intern analyst and associate training programs globally for investment banking clients. These training programmes cover accounting, corporate valuation and financial modelling. He has also delivered courses for various academic clients in the UK and Europe which have ranged from Corporate Valuation workshops to Financial Modelling seminars.
Prior to joining Training The Street, he worked in the London office of Bank of America Merrill Lynch where he served as Vice President in the firm’s EMEA Loan Execution and Management division. He has significant experience in structuring, documenting and executing loan transactions for companies in the telecommu-nications, industrial, oil & gas and insurance sector.
Zane commenced his investment banking career at J.P. Morgan as an analyst in their Financial Sponsors Group. Throughout his career at J.P. Morgan he held various roles. He worked in the firm’s training and development team as a fulltime instructor in the valuation section of the J.P. Morgan Investment Banking Training Programs for Analysts and Associates. He also taught credit risk analysis and the firm’s proprietary financial projection model in the United States, Europe, Asia, and Australia. Following his promotion to associate, he then joined the firm’s EMEA Restructuring & Asset Recovery division.
Zane holds a B.B.A. degree with a concentration in Accounting from Georgia State University.
fsrforum • volume 13 • issue #5
30 • Interview
»
there is upside there is also the downside risk if the transaction
does not go according to plan or expectations.
In valuing a company, different methods are used. Methods like DCF, CCA, CTA and LBO, which one is the most reliable and most useful in determining the company its value?The different valuation methods have their benefits and each
technique is unique to a particular situation. I refer to the
different results under the various techniques as data points
which provide valuation ranges to work within bearing in
mind the specific situation. I don’t rely on one or assume one
is more reliable than the other as each method has their
advantages and disadvantages.
Let me elaborate further by discussing two of the following
methodologies under a scenario were a subsidiary is being
sold by its parent and as an advisor we have been asked to
discuss the advantages and limitations of each. For this
example let’s focus on the comparable transaction and the
LBO analyses.
The comparable transactions analysis is a historical analysis
or “look back” of premiums and multiples paid to assume
control of a company. Individual buyer synergies and structure
of transaction will also impact these multiples. One of the
draw backs of this analysis is timing. Market conditions at
the time of a transaction have substantial influence on valu-
ation (i.e. competitive environment or scarcity of assets).
Information on premiums and multiples paid does provide a
historical perspective on what buyers have paid for these
kinds of assets in an M&A context.
The LBO analysis establishes a "floor" valuation for the com-
pany. It is used to determine what a financial sponsor can
afford to pay for a target and still realise an adequate return
(typically 20 – 25%) on its initial investment. What underpins
a LBO is the ability to raise the required amount of debt
(bank and bonds) typically 60 - 70% of the transaction value,
subject to market conditions. The balance of the purchase
price is funded with sponsor equity. The sum of debt raised
and sponsor equity contributed will get you to an all-in purchase
price. This analysis is heavily dependent upon leveragability,
cash flow profile of the company, and the financial sponsor
exit value assumptions.
Within the DCF Model, what are the main drivers to value a company?The following are key value drives in a DCF Model.
• Free cash flow (FCF): FCF is often referred to as unlevered
free cash flow, as it represents cash flow available to all
providers of capital and is not affected by the capital struc-
ture of the company. FCF is based on several operating
assumptions (i.e. sales, operating margins, working capital
and capital expenditures).
• Terminal value – Value of the company’s cash flow beyond
the forecast period. There are two widely used methods for
calculating this value:
• Exit Multiple Method: Assumes that at the end of the fore-
cast period, the company can be sold for a multiple of an
operating statistic (i.e. EBITDA).
• Perpetuity Growth Rate: Assume that the company’s free
cash flow will grow at a moderate constant rate indefinitely.
• Discount rate – The rate used to discount projected FCFs
and terminal value to their present values.
Although based on an objective calculation the assumptions
are subjective hence one of the reasons the DCF typically
yields the highest valuation.
Isn’t the value range of a company by using multiples not influenced by the economic conditions? In bull markets companies have higher multiples than in bear markets?It does depend on the sector as there are sectors that are less
affected by macro-economic conditions. Companies in these
sectors are referred to as defensive stocks and some sector
examples are healthcare, consumer staples and utilities.
In the corporate world there are some famous deal-makers who are well known about their ability to in most cases win a takeover process. Is their quality determined by strong valuation techniques or personal capabilities?To be successful in a takeover process I believe one requires
good negotiations skills and knows how to unlock value in a
business. Being able to identify a buying opportunity or
knowing when a company is undervalued are skills that are
developed. Personal capabilities are equally important as
once you succeed in acquiring a business the next step is to
successfully integrate the two companies.
To be successful in a takeover process I believe one requires good negotiations skills and knows how to unlock value in a business.
Interview • 31
Between sectors, there are a lot of differences about the valuation, what are the main technical differences when you valuate companies in different sectors? In other words, are you using similar DCF models to value a utility company or a fast moving consumer goods company?There are certainly different valuation techniques around and they need to be adopted for the
specific situation. For example, financial institutions use a Market Cap / Book Value metric. The
key when valuing a sector is to understand the valuations metrics that drive value. For technology
firms it maybe the number of subscribers or a multiple of sales while for a consumer goods
company it could be EBITDA or EPS.
Valuation metrics across industries differ and using a DCF application is not always applicable.
Take for example a technology company that is in the early stages of development and has no
record of earnings. Using a DCF is not applicable as you don’t have any cash flows to value.
Whereas a stable company with mature cash flow is a more suitable candidate for a DCF.
Did overvaluation, in terms of corporate takeovers and investment decisions, influence the economic downturn in the last crisis?I believe the recent economic downturn had less to do with corporate takeovers and more to do
with excessive risk taking on the part of investors who did not understand or were unaware of
the true risk of their investments. A good example of such an investment is the Mortgage-
Backed-Security (“MBS”). In the case of this security, once the underlying assets (cash flow
fsrforum • volume 13 • issue #5
32 • Interview
from the assets serviced the MBS obligations the securities) began to default and the rate at
which they did it was a scenario not anticipated my market participants. As the value of these
securities began to decline the repercussion were felt across all sectors and eventually the real
economy. Eventually this also affected the volume of corporate takeovers as several investors
that would fund these kinds of corporate events withdrew from the market and the equity markets
became volatile making it more difficult for an acquirer to raise capital.
Nowadays there are many rumours and news about the value of social media companies like Facebook and Linkedin, they are valued at enormous amounts. Do you believe these firms are overvalued and are we heading for similar IT-Bubble or are those companies valued right? There have been several articles on this topic as of recent and social networking is the latest
buzz word these days. I was in banking during the time of the internet bubble and am surprised
as the same investment thesis is appearing in recent IPOs which is that despite no track record
of earnings or the path to profitability is evolving, the valuations are based on some future
expected results.
In my opinion, each company needs to be evaluated on its merits. In 2000, it was almost as if
anything goes. A company did not need a business plan or customers base to come to market.
Anything with a dot com attached to its name performed well at IPO launch. This time around
it appears companies with a proven ability to grow sales and draw up a respectable business
plan are pursuing the IPO route.
From an investor’s standpoint, we have been here before and the best we can do now is to be
aware of it and try to avoid the same investments mistakes of over a decade ago.
After the crisis, many investors are searching for opportunities, in which sector(s)are a lot of opportunities at this time?At the moment, I believe several investors are adopting a “wait-and-see” strategy until the
market jitters, especially in the debt market, abate. I am not a market investors, but in this current
climate, I would look at defensive stocks, commodities like gold, or companies with emerging
market exposure.
If students are interested in corporate valuation and would like to pursue their career in this field. What are the main technical skills they have to develop and how could they further train themselves during their studies?Accounting is the language of business and also serves as the basis for valuation. Knowing how
to read and interpret financial statements is critical. Other skills I encourage students to
develop are financial modelling skills and being familiar with the different valuation method-
ologies. There are many corporate valuation techniques around, but I recommend that you
focus on those that are commonly used by practioners. Training The Street has a self-study
manual titled Fundamentals of Corporate Valuation. A Handbook that provides an introduction
to the commonly used valuation concepts and is great for laying the foundation and introducing
these concepts.
For more information on Training The Street and its products or services please visit their website
at www.trainingthestreet.com.
I believe several investors are adopting a “wait-and-see” strategy until the market jitters.
Interview • 33
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eineken? Ook H
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uctie, IT, Com
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Heineken_trainee adv_210x297_nw
.indd 119-04-11 11:45
Ook H
eineken? Ook H
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Man
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nt Train
ee
s Finance, Prod
uctie, IT, Com
mercie óf H
R. G
rote concrete opd
rachten, snel verantwoord
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Heineken_trainee adv_210x297_nw
.indd 119-04-11 11:45
The creation of shareholder value and the maximization of short term profitsMarc Schauten PhD
Even Jack Welch (former CEO of General Electric) seems to
have abandoned his beliefs and he has distanced himself from
shareholder value creation. ‘Obsession with shareholder
value was a ‘dumb idea’ did the Financial Times’ headlines
portray. It would lead to short-term profit maximization that
would endanger a healthy long-term strategy. This conclusion
is unjustified and reflects an unjust understanding of the
words ‘shareholder value’ and ‘shareholder value creation’.
The cause of the confusion lies in the value that is unjustly
attributed to ‘short-term gains’ or ‘short-term profits’ – often
expressed in earnings per share (EPS). It seems as if share-
holder value creation is thought of as the maximization of
short-term earnings. And that is not the case. Shareholders
clearly do want a positive return. And the higher and the
faster this return can be realized, the better. But – once again
– this is not obtained by maximizing short-term earnings.
The value of an enterprise is determined by all the expected
future cash flows. This means that a short-term project can
possibly create a lot of money, but if a competing long-term
project demands an equally big investment and generates
money during a longer period, the shareholder could as well
prefer this long-term project. Even if this long-term project has
a relatively unfavorable influence on the EPS on the short-term.
But don’t shareholders pursue the highest possible return?
And preferably within the shortest time period? That is true.
If I invest money for the studies of my children, then I prefer
to obtain the desired amount next year rather than in 15
years. And what is more, if I achieve a higher return than
planned, that is even better. Even if I am a long-term investor
– no matter how small – I will give preference to shares of
enterprises that ensure I will quickly achieve my end goal. Of
course, the same holds for pension funds and other institu-
tional investors.
How can it be that long-term projects deliver (high) positive
returns for investors on the short-term? The clue can be
found in financial markets. In a well-functioning market, the
share price reflects the value of all the projects that are exe-
cuted by the enterprise. Suppose that an enterprise announces
a new long-term project that will deliver a lot of money
during a number of years. Then the announcement of this
project will immediately lead to a stock price jump (rise).
Even if the cash flows will expectedly be realized far in the
future, the net present value of this investment is immedi-
ately expressed in the price of the relevant share. At the
announcement, the investor thus immediately benefits from
the long-term project. In other words, there has been direct
shareholders value creation. Shareholders are thus not by
definition better off with short-term projects that maximize
short term EPS. As long as financial markets work well and
enterprises provide sufficient information about the projects
that they execute, good short-term and long-term projects
will lead to positive share price adaptations. The net present
value of long-term projects is clearly not always as big as that
of short-term projects. It is even possible that the expected
cash flows of a long-term project are so low that the share-
holders prefer that the project is not executed. But that obvi-
ously also holds for short-term projects. If the investment does
not even out the value that it creates, it will not be executed.
Note that instead of investing in positive net present value
projects, firms can also choose to buy back shares with an
increase in the EPS as a result. This however, would not be
an action that makes shareholders – in theory – better off. The
EPS would be higher, as the financial risk for the shareholders.
In conclusion, it can be said that both short-term and long-
term projects are worth being executed, given that they
create more value than they cost. Long-term projects can
lead to positive returns for shareholders even if they do not
immediately contribute to the EPS on the short-term. There-
fore, the attention on short-term earnings should be replaced
by attention for both short- and long-term cash flows. The
value of the enterprise is not determined by the short-term
earnings but by all the expected future cash flows. It would
be beneficial if enterprises could provide more information
about those cash flows. If this provision of information stays
limited, it is possible that short-term gains are used, without
reasons, as predictors of short- and long-term expected cash
flows. And if that is the case, it can lead to unjust valuations
by investors and to unjust investment decisions by enter-
prises. It is then obvious that enterprises will prefer projects
that maximize short-term gains above projects that (could)
benefit the enterprise and its shareholders much more.
fsrforum • volume 13 • issue #5
The creation of shareholder value and the maximization of short term profits • 35
START YOUR CAREER IN TRADING APPLY AT WWW.OPTIVER.COMWE ARE SCOUTING FOR BRILLIANT MINDS ONLY
TRADINGBRILLIANTBRILLIANTBRILLIANT
IF YOU CAN ANSWER YES TO ALL 6, YOU’RE READY TO TAKE THE REAL TEST.
I HAVE UNLIMITEDAMBITION
I WORK HARDAND PLAY HARD
I DON’T CRACKUNDER PRESSUREI HAVE EXCELLENT
NUMERICAL SKILLSI DON’T LIKE TO
WASTE TIMEI THINK FASTER
THAN MOST PEOPLE
YES NO
IF YOU CAN ANSWER YES TO ALL 6,YOU’RE READY TO TAKE THE REAL TEST.IF YOU CAN ANSWER YES TO ALL 6,YOU’RE READY TO TAKE THE REAL T
START YOUR CAREER IN TRADING APPLY AT WWW.OPTIVER.COMWE ARE SCOUTING FOR BRILLIANT MINDS ONLY
TRADINGBRILLIANTBRILLIANTBRILLIANT
IF YOU CAN ANSWER YES TO ALL 6, YOU’RE READY TO TAKE THE REAL TEST.
I HAVE UNLIMITEDAMBITION
I WORK HARDAND PLAY HARD
I DON’T CRACKUNDER PRESSUREI HAVE EXCELLENT
NUMERICAL SKILLSI DON’T LIKE TO
WASTE TIMEI THINK FASTER
THAN MOST PEOPLE
YES NO
IF YOU CAN ANSWER YES TO ALL 6,YOU’RE READY TO TAKE THE REAL TEST.IF YOU CAN ANSWER YES TO ALL 6,YOU’RE READY TO TAKE THE REAL T
Company presentationDo you have what it takes to become our next trader at Optiver?
Optiver is een internationaal en innovatief handelshuis. Onze core business is electronische Market Making en arbitrage in financiële producten, zoals derivaten, aandelen en obligaties. We handelen voor eigen rekening, op eigen risico en we hebben geen klanten. Met kantoren in Amsterdam, Sydney en Chicago, 600 medewerkers en 30 verschillende nationaliteiten, wordt er wereldwijd 24 uur per dag gehandeld. Sven Hubens is sinds maart 2011 werkzaam als Trader bij
Optiver. Dit interview is voor hem een ideale gelegenheid om
te vertellen wat zijn functie bij Optiver inhoudt en wat zijn
ervaringen tot nu toe als starter op de arbeidsmarkt zijn.
Waarom heb je gekozen voor Optiver?Op jonge leeftijd was ik al erg geïnteresseerd in de beurs en
belegde ik al in aandelen. Ik heb altijd de drive gehad om ooit
eens op de beurs te mogen handelen. Tijdens het laatste jaar
van mijn studie ben ik me gaan oriënteren op mogelijke
banen gerelateerd aan de beurshandel. Ik wist van mezelf dat
ik goed ben met cijfers en ik houd van het werken met geld.
In mijn zoektocht kwam ik al snel uit bij Optiver. Ik ben toen
naar een presentatie gegaan en het werd me al snel duidelijk
dat Optiver een erg dynamisch bedrijf is waarin resultaat telt
en werknemers snel kunnen groeien. Ik was erg onder de indruk
en wist vanaf dat moment dat ik bij Optiver wilde solliciteren.
Wat is je functie binnen Optiver?Mijn werk is het handelen in opties. Met behulp van com-
putermodellen en marktinformatie geef ik prijzen af waarop
de markt een bepaalde optie kan kopen of verkopen. Op deze
manier verschaffen we liquiditeit in de markt. Daarnaast
probeer je als handelaar ook op andermans prijzen te hande-
len indien die winstgevend blijken te zijn of van belang
kunnen zijn voor je handelspositie. Naast het handelen an
sich, is het erg belangrijk om in staat te zijn de posities die je
zelf hebt te kunnen managen en je risico limieten te
beperken. Ik maak deel uit van het CODEC team. In dit team
handelen we vooral in fixed income en currencies. Hierbij
kun je denken aan het handelen in opties op bijvoorbeeld de
Duitse staatslening, de EUR/Dollar, et cetera.
Hoe heb je de eerste maanden ervaren bij Optiver?De trainee periode duurt twee maanden. De eerste maand is
theoretisch erg intensief. De totale optieleer wordt je bijge-
bracht en tijdens deze interactieve periode wordt ook je
inzicht getest. Het meteen toepassen van nieuwe kennis of
ideeën is wat Optiver zo uitdagend maakt. De maand erna
staat in het teken van simulatiehandel. Hierbij leer je gevoel
te krijgen hoe de handel in elkaar steekt. Na twee maanden
maak je echt deel uit van een team op de handelsvloer. De
leercurve is steil; je krijgt binnen korte tijd veel verant-
woordelijkheid op je eigen ‘spot’.
Waarom zouden studenten voor Optiver moeten kiezen?Ten eerste is Optiver een bedrijf met veel jonge mensen van
veel verschillende nationaliteiten. Daarnaast hebben werk-
nemers allerlei verschillende studieachtergronden; velen hebben
echter wel een economische of een abstracte studie gevolgd.
Er heerst een innovatieve, open en informele cultuur die mij
erg aanspreekt. Verder ben je hier als trader het overgrote
deel van je tijd bezig met je passie: handelen. Optiver is een
uitstekend bedrijf als je wilt werken in een dynamische
omgeving waarin je snel veel verantwoordelijkheid kan krijgen
en resultaatgericht kan werken.
Do you have what it takes?Voor afgestudeerden die gedreven en competitief zijn hebben
we verrassende carrièremogelijkheden. Heb jij affiniteit met
financiële markten, ben je analytisch sterk, in het bezit van
een winnaarsmentaliteit en ben je in staat om onder druk
beslissingen te maken? Misschien ben jij de versterking die
Optiver zoekt: we accepteren het hele jaar door sollicitaties
voor de positie van Trader.
Kijk op www.optiver.com voor meer informatie of neem con-
tact op met Kim Ruijer (Recruiter Trading) via 020 708 70 00.
Nelleke van ‘t Hoff
fsrforum • volume 13 • issue #5
Company presentation Optiver • 37
dit geval een drama. De moraal? Samenvoegen is niet zo
moeilijk. Maar als je instapt, zul je ooit weer moeten uitstap-
pen. Regel dat meteen goed. Die kans krijg je vaak maar één
keer, namelijk voorafgaand aan de start. En als je niet van
elkaar af kunt, en scheiding dus geen oplossing kan bieden,
is een regeling voor als het mis loopt nog veel belangrijker.
Het zijn micro-ervaringen. Zo heet dat in economie. Als het
om aggregaten gaat, wordt het macro genoemd. Europese
samenwerking zal dus wel macro zijn. Maar de parallellen
zijn zichtbaar. Met na-oorlogs enthousiasme hebben landen
besloten samen te werken. De Benelux was een goed voor-
beeld. Daarna kwamen de EGKS en Euratom, met in het kiel-
zog de E.E.G.: een economische gemeenschap van 6 landen.
Daarna kon het niet op. Inmiddels is de beperking tot de eco-
nomie vervallen en is de club gegroeid tot 27 landen met 5
kandidaat-landen en nog eens 4 potentiële kandidaat-landen.
Het kan nauwelijks nog groter worden, tenzij we de E van
Europa los laten. Of we moeten nieuwe landen maken, res-
pectievelijk oude landen opnieuw uitvinden. Dat is een
tegenvaller voor die politici die van uitbreiding van de EU
hun beroep hebben gemaakt. Die wel van toetredings-voor-
waarden spreken, maar pas achteraf willen vaststellen dat
daaraan niet werd voldaan. En dan is het te laat. De rest van
Europa betaalt inmiddels alimentatie, terwijl scheiding is
uitgesloten.
Je zou denken dat Europa zo sterk is dat het geld voor zo’n
kleine Griekse economie wel kan worden opgebracht. Europa
heet een bolwerk te zijn. Maar kennelijk kunnen “speculan-
ten” (hedgefunds zouden de verdachten zijn) dat bolwerk aan
het wankelen brengen. “Misdadige speculanten” worden zij
ergens op internet genoemd. Waarom eigenlijk? Zij houden
zich keurig aan de regels van het spel. Zij stellen de kracht
van de kudde op de proef. Soms als eenlingen en soms als
Als businessvaluator heb ik met regelmaat te maken met par-
tijen die ooit hebben besloten samen te doen. (Bijna) niets is
zo leuk als gedeeld enthousiasme. Iets gaan bewerkstelligen
dat je samen beter kunt bereiken dan alleen. Je stimuleert
elkaar. Je kunt door werkverdeling gebruik maken van
elkaars sterke punten, terwijl ieders zwakke punten minder
op de voorgrond hoeven te komen. Je netwerk is groter. Je
kunt aan schaalvoordelen gaan denken. En je hebt een klank-
bord. De uitnodiging om iets samen te gaan doen, is boven-
dien een compliment. De ander komt naar jou toe. Hij zou
ook een ander hebben kunnen kiezen. Dus je bent geneigd op
die uitnodiging in te gaan. Je stelt samenwerkingsvoorwaarden
op en maakt een overeenkomst. Daarna ga je aan de slag. Dat
kan heel lang goed gaan. In een traditioneel huwelijk beloof
je trouw tot de dood je scheidt. In een zakelijke samenwerking,
duurt het vaak korter. Vaak is het terugtrekken een kwestie
van pensionering en opvolging. Ook vaak ontstaat een breuk
doordat partijen ruzie krijgen. En dan blijkt dat de samen-
werkingsovereenkomst van weleer daar geen handleiding
voor geeft. Dat komt denk ik door dat aanvankelijke enthou-
siasme. En het komt door een advies dat bij de start hierin is
tekortgeschoten.
Het kan erger. Dat is het geval wanneer één van de partijen
zich wel degelijk heeft gerealiseerd dat de samenwerking niet
voor eeuwig zal zijn. En dus wijzen in dat geval de scheidings-
voorwaarden in zijn voordeel. Hij heeft zich bij voorbaat
ingedekt. Zo worden formules afgesproken die geen recht
doen aan de voorafgaande samenwerking en de daarmee
behaalde resultaten. Soms zo scheef dat de wederpartij zich
niet eens kan veroorloven zich uit de samenwerking terug te
trekken. Dat kan dan de vooropgezette bedoeling geweest
voor de zittende partij. Soms zo ingewikkeld dat niemand die
meer begrijpt. Soms gewoon misleidend.
Een voorbeeld? 10 * de gewogen gemiddelde winst van de
laatste 3 jaren met als minimum de intrinsieke waarde. Een
en ander gebaseerd op jaarrekeningen die door een accoun-
tant zijn goedgekeurd. Zo’n formule zal menig verkoper als
muziek in de oren klinken. Maar wat te denken als de koper
een calloptie heeft, en de onderneming in een startfase ver-
keert? Op de initiële investeringen wordt afgeschreven: dus
verlies en een geringe intrinsieke waarde. De beloftevolle
onderneming wordt op basis van deze mooie regeling voor
een schijntje onteigend. Voor de verkopende partij was dat in
In een traditioneel huwelijk beloof je trouw tot de dood je scheidt.
Drs. Joost G. Groeneveld
RA RV is directeur van
Wingman Business
Valuators B.V. te Breda en
voorzitter van de Stichting
WBO (register van
business valuators). Hij
was hoofddocent aan de
Economische Faculteit van
de Erasmus Universiteit te
Rotterdam.
Samen; de Europese schaduwprijs
K(r)anttekening | Drs. Joost Groeneveld RA RV
38 • Samen; de Europese schaduwprijs
fsrforum • volume 13 • issue #5
meute. Soms zonder succes en soms met succes. Dat succes hangt in hoge mate af van het
gedrag van de kudde. Griekenland is ten prooi gevallen. We doen net of het beestje nog onder
ons is. Maar het is verorberd waar we bij stonden. Het zal uit zijn as moeten herrijzen. Ach, het
was een beetje een scharminkeltje. De kudde werd er niet veel zwakker door. Inmiddels wordt
wel op nieuwe prooien gejaagd, ook al zijn die wat groter en wat sterker. En met verbazend veel
succes.
Het wordt hoog tijd dat Europa zich versterkt. Europa is als zodanig een monopolist, of dan
toch ten minste een kartel. Maar Europa verdedigt zich slecht. Het zal de angst zijn voor de
aloude vraag: “Wie zal dat betalen?”. De banken? De pensioenfondsen? De 27 overheden? Het is
een academische vraag. Want hoe het ook zij: achter al die instellingen schuilen de burgers die
het gaan betalen. En al aan het betalen zijn: door een eurokoers die zich in hun nadeel ontwik-
kelt; door inhoudingen op pensioenen; door lagere beurskoersen, door bezuinigingen. Bij
elkaar bepalen zij de hoogte van de schaduwprijs voor de adequate verdediging van wat nu
Europa is. Griekenland, Italië, Portugal, Spanje: stations die de Europa-express in volle vaart is
gepasseerd.
Minister de Jager in De Volkskrant van 13 juli 2011: “Griekenland had nooit aan de Euro
gemoeten”. Dat had ik graag tijdig willen horen van zijn CDA, toen de Euro werd ingevoerd.
Door - zoals hij - nu steeds maar te praten over steun voor die landen gaan we voorbij aan de
kern van het probleem. Het gaat niet om Griekenland. Het gaat niet om steun. Het gaat om
Europa en om het instrumentarium dat je voor Europa wil inzetten. En Europa? Dat zijn wij
nu allemaal samen: “for better and for worse”.
“Griekenland had nooit aan de Euro gemoeten”.
Samen; de Europese schaduwprijs • 39
Word of the chairman
Luc Gerretsen
Dear members,
This is already the last FSR Forum edition of the academic year 2010-2011. At the time of writing.
the last re-sits are examined and some of you might be struggling with their bachelor- or
master thesis in H3 or the library. As far as the weather concerns you probably won’t be having
a problem with typical Dutch summer since it’s raining cats and dogs. Hopefully, the weather
Gods will bring out the sun in August.
The theme of this FSR Forum is valuation, I would like to make a the metaphor for valuating
or better, evaluating our board year. As cliché as it might sound, time really flies as a board
member. After the extremely busy starting period in September and October with a Master Kick
Off Day, the International Banking Cycle, Big 4 Cycle, start ups of other events, drinks etcetera,
it’s Christmas before you realize it. The Christmas break was the first moment that my colleagues
and I evaluated the organised events. We also did an 360 degree feedback session on each
other’s performance. Looking back on the year this feedback session was in my opinion one of
the most contributing aspects. This was a moment when you could truly feel that the board
functioned as a hardened team that could concur any challenge. The next half year we had a lot
of events, among which a couple of new events and two international trips. Besides this, we also
started the lookout for six talented and enthusiastic students to become our successors.
After an intensive selection process consisting of interviews we were proud to announce the
new board on the 10th of June. The members of the XIVth FSR board are Wessel Ploegmakers,
Jordy Streng, Lizzy Veldt, Gerbert Bos, Anne van Driesum and Bas Lips. Special attention
might go to Bas Lips, he is the third ‘Lips’ after his brothers Bram (XII) and Bart (XIII) in the
FSR board. From June onwards we have been working with our successors to make sure they
know all the ins and outs of the association. On Thursday the 1st of September the XIVth board
will officially be installed at the General Members Assembly in Restaurant Kip. I would like to
invite you all for this special moment from 20.00 hours onwards. The official invitation will be
sent within a couple of days. Further in this FSR Forum the new board members will introduce
themselves.
At the moment, the XIVth board is working very hard to make the upcoming academic year
even better than the previous. The destinations of the International Research Project and Euro-
pean Finance Tour are determined, the International Banking Cycle is being improved, our
social media activities are expanded and many more exciting developments take place. An asso-
ciation like the FSR never stands still and is therefore interesting to follow. Each board can
bring new aspects into the association and it will take at least five years to be able to see what
the radical changes are that my board has made. However, I am sure that we can look back very
satisfied on the previous twelve months.
After forming the board for the academic year 2011-2012, the FSR is on the lookout for new
committee members. A year as committee member includes a wide range of new experiences
from the first contacts with the corporate world to improving your organizing skills. However,
it’s not only organising activities, since it also includes an active members day, active members
weekend and numerous drinks and dinners. A year as committee member is a very strong asset
on your C.V. At the same time you build a strong network
among students who will also start working in your field of
interest within 1 or 2 years. The search for new committee
member is being led by the new board. If you have any interest
you can send an e-mail to [email protected]. For more specific
details I advise you to look on the website www.fsr.nl. Not
convinced yet? You can also have an informal talk with one of
the board members first to find out whether it fits you to
become active at the FSR.
The year for the XIIIth board is coming to an end and on
behalf of the whole board I would like to thank all our members,
partners, teachers, the Secretary at H-14 and our active
members. It was an unforgettable year which I consider to be
essential in the academic development of a student. For
myself, within three hours from now I catch my flight to
‘sunny’ Italy and will enjoy a relaxing holiday. I hope to see
you next year and wish the new board all the success! Enjoy
your summer!
fsrforum • volume 13 • issue #5
40 • FSR news
I enjoyed every moment of our FSR Board year: organizing
and presenting our activities, spending time together, having
that many enthusiastic committee members around us and
the intensive contact with our sponsors and with the univer-
sity staff. As a commissioner IRP, I had the fortunate position
to enjoy the FSR Board year the longest. While the others
were practically handing over their board tasks to the members
of the 10th board in June, I was still preparing and looking
forward to the trip to South Korea!
Our best Board performance? I think that we have been able
to organize good quality activities during our Board year:
many enthusiastic participants and record breaking sponsor
participation! Personally, I am proud of the IRP. It went all
very well with the group, we were very welcome in South
Korea, spoke to interesting people, have seen much of the
city Seoul and its surroundings and we can all be proud of
the book that is published with all our papers on the subjects
of the IRP! And above all, it was a great time!
The moments I remember most of the social activities, are
(of course) the IRP to South Korea and the active members
weekends to Antwerp, Paris and Köln. During those weekends
you get to know your committee members and board members
from a whole different perspective! Some jokes or events are
still brought back when we meet with the Board. Further-
more, I also remember one of our activities: flowriding and
rafting at Dutch Water Dreams. The flowriding went well,
although no one seemed a natural talent in it, but it was fun!
But then: the rafting! Together with my co-Board members
and one committee member, I shared a raftboat. The rafting
was not that successful for me; I learned not to be too helpful
to others all the time. During the rides down the simulated
river, I tried to help everyone back in the boat but ended up
in the water myself three times out of four!!!
The FSR took indeed a great part in my career path. During
the Board year, I came in contact with the Big 4 accountancy
firms, of which also Ernst & Young. Events such as the Big 4
Cycle, Bachelor Accountancy day or Accountant Firms Day
enable you to get to know your possible future employer and
to network.
After many inhouse days and other activities with the four
firms during my studies and the Board year, I noticed that I
liked Ernst & Young as an organization and the employees
that I came across with during the activities most. Therefore,
in my Masters I applied for an internship to write my master
thesis. For me this was the perfect opportunity to get to
know the people at Ernst & Young and to finish my thesis in
a short time period.
After the internship and after graduating from the university,
I received a job offer and have been working at Ernst &
Young since then, in the position of assistant auditor. When
I started working in 2008, I started the study to become a
certified auditor (Register Accountant (RA) in Dutch) at the
Erasmus university as well. It was nice to be back at the uni-
versity for one day a week and to be able to develop my skills
and knowledge directly from the start of my career with
external and internal studies and trainings!
My average work day? Because we are auditing the clients’
financial figures, we spend most of the time at our clients’
offices. Those who do not know what auditors actually do,
think that it is all about bookkeeping and financial figures!
On the contrary, it is really a people-business. Contact with
the client and within the audit team is very important, and
we spend a lot of time on interviews with the client and com-
munication of results to and discussions with the team. The
variety in clients, clients’ businesses, team members/col-
leagues and the great share of knowledge that you gain
during the years are a real advantage of my job!
The culture at Ernst & Young reminds me of the FSR: many
different kinds of people, all young, dedicated, very ambitious
and trying to get the best result out of their work, but they
are all up for a drink and other social activities! Ernst &
Young is still participating in the activities of the FSR such as
the Big 4 Cycle and the IRP and with some of them I am
involved as well. It is nice to see the FSR from ‘the other side’
and find out that the FSR is doing so well and is able to
attract that many enthusiastic board members, committee
members and participants for their activities every year
again! The FSR is still ‘my’ association and I am extremely
proud to have been able to be part of all this during my Board
year!
PassportName:
Nelleke van ‘t Hoff
Age:
26
Residence:
Rotterdam
Employed at:
Ernst & Young
Current position:
Audit
Which FSR Board:
9th (2006/2007)
Board function:
Commissioner International
Research Project
Studies:
Accounting, Auditing and
Control (Bsc. &Msc.) at
Erasmus School of
Economics
Year of graduation:
2008
Which car do you drive:
Seat Ibiza
What do you drink on a
Friday night:
(dry white) wine
Life motto:
Live every day as if it were
your last and never regret
a thing!
FSR Former board member
Nelleke van ‘t Hoff
FSR news • 41
fsrforum • volume 13 • issue #5
FSR Activity reportInternational Research Project 2011
In the afternoon of the 1st of May the participants of the IRP
2011 gathered at Schiphol Airport for the start of the Inter-
national Research Project 2011. After the celebrations of
Queens’s day the day before, some looked a bit paler than
others, but nonetheless the luggage was checked in and the
last goodbye-hugs and kisses were given to the relatives and
friends staying behind. A last word of wisdom and encourage-
ment by Chairman Luc Gerretsen and the group wanders
towards the gate. An unforgettable journey is about to begin.
After a flight of 12 hours we arrived in the late afternoon in
Singapore, where we were welcomed by Ellis and Niels, two
committee-members who had already left for Singapore two
days earlier to do the last on-location preparations. After
checking in and a quick shower at the hotel, the group travelled
to the New Asia Sky Bar in the Stamford Tower, one of the
highest bar's in Singapore, for a welcome drink and speech.
The view of the Singapore skyline by night, while enjoying
the typical "Singapore Sling" cocktail, was the perfect place
to kick off our two-week adventure in these two vibrant cities
in booming Asia. Cocktails on an empty stomach got everyone
hungry, so the time had come to get acquainted with local
food. This was done in one of the many and cheap food
courts, where a diversity of food was available; from typical
chicken 'n rice to multiple kinds of organ meat. After this,
the group split up for some quiet drinks or an early sleep
since the next day the first company visits were planned.
The next morning the group stepped into the crowded
subway during rush hour, where we got a good feel of the
busy economy of Singapore. Lucky for us we were heading to
the outskirts, where we would visit the Dutch, family-owned
multinational: Van Leeuwen Pipe and Tube. Here we were
welcomed by one of the three Dutch employees/managers of
Van Leeuwen Singapore, who told us about his experience of
living in Singapore and how this was different from the Nether-
lands. After him, we received a presentation on what kind of
business Van Leeuwen Pipe and Tube practices and how they
were doing business as a Dutch multinational in Asia. Ending
the morning with a lunch and a tour around their storage
facilities, the group was given some time off to explore the
beautiful city of Singapore before gathering again at Ernst &
Young. Here we had a short tour around the office, followed
by an informal drink with the employees of E&Y where we
had the opportunity to ask questions about their line of work.
This turned out to be a useful moment to gather information
which would later be used in the participants' researches. In
the evening, a group dinner was organized in the city centre
after which the programme of the day ended. The next day it
was again a day with Dutch multinationals, this time; Vopak
and ABN-Amro. We started off with an introduction at the
Vopak headquarters in Singapore, after which we were trans-
ferred to the Vopak terminal plant in the harbour of Singapore,
the heart of Singapore’s industry. After this impressing tour
around the terminal plant, the next stop was ABN-Amro.
Here we were given several presentations by amongst others
the ABN-Amro country manager of Singapore, about the
Mattis Ooms
fsrforum • volume 13 • issue #5
42 • FSR news
»
booming and on-going growth-potential of Singapore in the
financial markets. The day was ended with a case-study,
followed by a social drink with the 'Hermeskring Singapore'
at the colonial Singapore Cricket Club. Since this was already
our last night in Singapore, it was time to discover the exten-
sive Singapore nightlife. This turned out a successful and
unforgettable night, which included the experience of wit-
nessing Singaporeans getting 'sick' in the middle of the club,
about every 10 minutes. After a short night, the suitcases
were packed and direction was set for Central Station, where
we said our goodbyes to Singapore and departed for our next
destination: Kuala Lumpur. It was a long journey of 7 hours
through everlasting palm oil fields, but after having arrived
at our hotel, with infinity-edged swimming pool with a view
on the Petronas Twin Towers, it turned out worth the trip.
Opposed to Singapore, which was very clean, strictly organ-
ized and Western-like, this city was much more chaotic and
dirty. The smell of the open sewage system was not uncom-
mon and the hawkers on the street left their raw chicken and
meat open for display for questionable lengths. This gave a
more Asian feeling to the city
and highlighted the cultural
differences between Malaysia
and the Netherlands. To even-
out the culture shock, we had
planned a visit to the Dutch
Embassy for the Friday morn-
ing. However, due to prepara-
tions for the celebration of
Liberation day, the staff at the
Embassy did not have time to
receive us and therefore
instead invited us for the
celebration later that day. So
our first company visit in KL was at the Malaysian Palm Oil
Board. Since Malaysia is the number one producer of palm
oil in the world and 60% of the land area of Malaysia is used
as palm oil plantations, we were highly interested to get to
know more about this. After a presentation on MPOB, we were
given a fascinating tour on how palm oil is produced and a
demonstration on the infinite possible applications of palm
FSR news • 43
oil. By now, the celebration of Liberation Day at the home of
the Ambassador had started, so we headed that direction.
With Heineken beer in one hand, and a 'bitterbal' and herring
in the other, the national anthem was sung. Having got
acquainted with many other Dutch people, it was time to set
forth the evening to discover the nightlife in KL. This,
already at the start, infamous evening turned into a great
success and the next morning everyone was grateful no com-
pany visits were planned since it was weekend. This Saturday
everyone had the day off, so many stepped onto the KL
Hop-on hop-off bus to discover KL and do the typical touristy
sightseeing activities. In the evening, the group gathered
again from all over town for an exquisite diner, after which
another night of partying began.
Another programme-free day gave everyone the opportunity
to get some extra sleep, chill out and do some more sightseeing.
In the late afternoon, the group met again to see the sunset
from the KL Tower, after which a bar was found to see a game
of football and at twelve o'clock celebrate Pieter Oudshoorn's
21st birthday!
The next morning a new and fully-booked week started.
Monday started off with a visit at software developer Exact.
After various presentations, the visit was followed by a tour
through the office (including its research department). In
the afternoon, we were received by the Malaysian stock
exchange, Bursa Malaysia. Here we received a presentation
on the stock exchange and a professional trader, Kevin Tan,
shared his experiences as a trader. The next day, Tuesday, we
headed for the outskirts of Malaysia for a visit to Bufori, an
exclusive handmade car manufacturer. Here we got a presen-
tation on the history and market of the firm, after which we
were given a tour through the factory to see the interesting
production process of the exclusive Bufori cars.
After this it was already time to head for the Petronas Twin
Towers for our visit to Petronas, the Malaysian national oil com-
pany. This oil company turned out to be one of its kind since,
unlike other state-owned oil companies, their objective is to
make high profits, instead of directly providing cheap oil to the
people of Malaysia. After the company presentation and intensive
Q&A session, we were brought to the famous Skybridge, at staff-
level, to witness the view of KL. This evening, the group had
dinner at a typical Malaysian food restaurant, where Bas gave an
emotional evaluation of how the participants of the IRP 2011 by
now had turned into a group of close friends through sharing
this amazing experience on the other side of the world.
fsrforum • volume 13 • issue #5
44 • FSR news
The next morning we headed off for the University of Malaya,
by far the biggest university in Malaysia, for a tour around
their 900 acre campus and the university museum. This
Wednesday afternoon no company visit was planned, so every-
one had time off to visit the Batu Caves or do some shopping.
This evening, another dinner, this time Japanese, was
planned, followed by probably the most memorable night of
the IRP, at Club Rootz, where we 'had the time of our lives'...
The next day it was time for our visit to Chartis, where we
toured around their call-centre. This call-centre with bright
coloured balloons and cheering and clapping employees was
something none of us had ever experienced. In the afternoon
we were brought to a major client of Chartis; SenQ. The
founder of this Malaysian version of the Dutch Mediamarkt
came to tell his story of success; how he, from a broke young
men, built a chain store of electronic goods with revenues of
$900 million per year, without ever taking out a loan from a
bank. This evening it was time to go to bed relatively early,
but when the men found out there was a model party at club
Bedroom, they just had to take a look, wearing their bath-
robes...
The last Friday started with a visit to the Islamic bank;
Kuwait Finance House. First we had a look on their trading
floor, where most of us were surprised by the relatively
many women working there. After this we received a pres-
entation on the concept of Islamic Banking, which was
unfamiliar to us and therefore created an interesting and
somewhat awkward Q&A session. Our final company visit
was at Cargill, one of the largest commodity trading and
processing firms in the world. Again we were welcomed by
a Dutchman, who gave us a presentation on their business,
after which the country manager of Malaysia came to
answer our remaining questions. The afternoon was ended
with a short social drink before we headed off back to the
city centre for a last evening together. This started with a
final exquisite dinner, including an amusing story from the
group thanking the committee for the organisation of such
a successful project. After this we headed back to the hotel
to freshen up and celebrate Jordy Streng's birthday, yet
again IRP-style, followed by a final night of unforgettable
clubbing. The next morning the suitcases were packed and
the group headed for the airport, to say a last goodbye
before a part of the group flew back to Amsterdam, while
the rest scattered all over South-East Asia, for another two
weeks of traveling.
It has been an amazing project, starting with the in-house
days in the Netherlands, where the group merely existed as
pairs or individuals, turning into a group of close friends
during the unforgettable, once-in-a-lifetime experience in
Kuala Lumpur and Singapore. This project would not have
been possible without the support of our partners and the
Financial Study association Rotterdam and of course the par-
ticipants of the International Research Project 2011! Many
thanks to them and a special thanks to Ellis Heijboer for the
amazing job she did leading the organization of this fantastic
project!
FSR news • 45
FSR Activity reportCorporate Finance Competition 2011
»
On Monday 20 participants travelled to Santpoort where they
were welcomed in Duin & Kruidberg. After a lunch in the
garden, The Royal Bank of Scotland was the first company to
kick off the competition. After a presentation the participants
could show their skills while working at a mergers and acqui-
sition case. You could already feel the tension and competition
between the teams. After this case the participants could get
to know each other while enjoining a lovely Italian buffet on
the balcony in the garden while the sun was still shining.
After dinner it was time for a case presented by Ernst &
Young. During the case the teams had to work with a LBO-
model on a laptop. You could already see that the teams were
becoming attuned to each another. At the end of the first day
‘Team Yellow’ was the team that acquired the first place. The
day ended with some drinks in the lounge bar where the par-
ticipants could talk informally with the employees of Ernst &
Young and ask all their questions.
The next day started early with a delicious breakfast, after
which the third case presented by ABN AMRO Corporate
Finance & Capital Markets started. All teams were deliberating
and dividing the tasks among themselves. The cases involved
one selling team and three bidding teams, and after a lot of
negotiating the selling team finally made a deal. After the
case the participants could enjoy lunch together with the
employees of ABN AMRO Corporate Finance & Capital Markets.
On Tuesday afternoon it was time for some relaxation. With
On Monday May 30 the last FSR event of the academic year 2010-2011 named the Corporate Finance Competition started in the luxurious five star hotel Duin & Kruidberg. During this three-day business course four teams compete against each other by solving corporate finance oriented cases prepared by ABN AMRO Corporate Finance & Capital Markets, BDO Corporate Finance B.V., Ernst & Young, Rabobank International and The Royal Bank of Scotland.
fsrforum • volume 13 • issue #5
FSR news • 47
the whole group we left in taxis to recreation park Spaarn-
woude where it was time for some physical exertion. We went
canoeing after which we could relax in the sun.
Beside the presentations, cases and drinksm the Corporate
Finance Competition also includes a dinner together with all
five participating companies. Tuesday evening this dinner,
where the participants switched tables after each course,
took place. During this dinner the participants were able to
talk to three companies in an informal way and the companies
had the opportunity to tell more about their work field and
the company culture. The evening concluded with several
drinks at the bar where the participants could talk with the
companies they did not spoke with yet.
Wednesday was the last day of the Corporate Finance Compe-
tition with still two cases left. Rabobank International started
the day with their presentation, after which the students had
to work on the case. You could really feel the competition
among the teams and they all worked hard to get the last
points to finish on the first place and to win the bottle of
champagne Rabobank International would hand out to the
winning team. The competition ended with a very interactive
case presented by BDO Corporate Finance B.V.. The students
had to interview clients and eventually make a deal under a
lot of time pressure. The teams were really enthusiastic
about the case and put all their effort in it to win.
After the final case the points were added and it was time for
fsrforum • volume 13 • issue #5
48 • FSR news
»FSR news • 49
the prize ceremony. We ended the competition with a big
toast on ‘Team Yellow’ that won the Corporate Finance Com-
petition 2011. On behalf of the FSR I would like to congratulate
Willemijn Wijne, Robert Swart, Caspar Bijleveld, Sierd Bron
and Pete Schelevis with their excellent result!
After three intensive but also enjoyable days with presenta-
tions, cases, lunches, drinks and dinners we can look back at
a successful corporate finance event. If you have an interest
in corporate finance, make sure to subscribe for the upcoming
edition. During this event you will get to know five different
companies who all work in the field of corporate finance.
Because of the variety of cases and presentations, as well as
the drinks, dinner and lunches you are able to get to know
more about working in corporate finance and what the informal
atmosphere is like in different companies.
On behalf of the Corporate Finance Competition Committee
I would like to thank ABN AMRO Corporate Finance & Capi-
tal Markets, BDO Corporate Finance B.V., Ernst & Young,
Rabobank International and The Royal Bank of Scotland, the
participants and Duin & Kruidberg for their effort and
enthusiasm. We hope that all participants have received valu-
able information and an impression of five companies they
might be working for in the future.
fsrforum • volume 13 • issue #5
50 • FSR news
Accountancy - Belastingen - Advies
Wat belangrijk is, laat je niet los.
Ik wil ruimte om te groeien. Waar zet ik de volgende stap?
Waar je ook bent, belangrijke beslissingen zijn nooit ver weg. In je rol als accountant en bij het bepalen van je volgende carrièrestap. Bij Grant Thornton begrijpen we dat je voortdurend bezig bent met je groei. Sterker nog, wij zijn er zelf ook mee bezig. Onder andere door jouw ambities alle ruimte te geven en door je talent te versterken met een goed doortimmerde opleidingsaanpak. Meer over ons op onze website.
www.carrierebijGT.nl
Grant Thornton bij jou in de buurt:Alphen aan den Rijn - Amsterdam - Boskoop - Gouda - Leiden - Rijswijk - Rotterdam - Woerden
XIVth FSR Board 2011-2012
WESSEL PLOEGMAKERSMy name is Wessel Ploegmakers and I will be this year’s chairman of the XIVth FSR board. I was
born 22 years ago in Amersfoort and currently live in Delft. Started off studying Architecture at
the TU Delft but decided after one year that drawing buildings was not my greatest talent.
Therefore, I switched to the International Business Administration bachelor programme at the
Erasmus University in 2008 and successfully finished it in three years. As a participant in the
Investment Banking Masterclass, I became involved with the FSR. During last year I was part
of the Corporate Finance Competition committee and went to cultural hotspot Paris with the
European Finance Tour. These experiences encouraged me to increase my involvement with
the FSR. I am looking forward to the next year with great enthusiasm and hope to see you
around at one of our events.
JORDY STRENGHi there, my name is Jordy Streng (22) and I will be the secretary of the fourteenth FSR board.
Next to this function I will also organize the Accountants Firm Day and the two corporate dinners.
Currently, I am a Masters Financial Economics student and I intent to graduate during my
board year. Last year I got connected with the FSR by participating in the International Banking
Cycle committee. Because of the fact that I enjoyed and learned a lot in this committee, I
decided to apply for a board function. I hope to extend this experience from the IBC committee
in a great board year with a lot of learning, great activities and fun with my fellow board members
and the active committee members!
LIZZY VELDTMy name is Lizzy Veldt , I am 21 years old and I just completed the bachelor Business Administration
at the Rotterdam School of Management. After having lived for 18 years in Bergen, a picturesque
town in the North of Holland, I moved without hesitation to Rotterdam when I finished secondary
school. In the third year of my bachelor I went on exchange for four months to Queens University
in Kingston (Canada), which was a great time and a great learning experience as well. When I
got back from exchange I got the opportunity join a committee of the FSR, which also gave rise
to a new challenge: Becoming member of the XIVth board of the FSR!
During the academic year 2011-2012 I will be the treasurer. Besides that, I will organize some
events together with a committee. I expect that, together with the other five board members,
we will make this year a very successful one! A year with a lot of challenges, great events, a new,
inspiring network and hopefully even more growth of the FSR.
fsrforum • volume 13 • issue #5
52 • FSR news
GERBERT BOSMy name is Gerbert Bos. I'm 20 years old and I just finished my bachelor International Business
Administration. I already live in Rotterdam for 3 years and last year I have been on an exchange
to Bangkok. I haven't been active within the FSR before. I have done several committees within
my fraternity, so now it was time to get some more professional experience. For the upcoming
year I will be the Commissioner of External Relations. The main reason for applying at this
function was the contact with so many different interesting companies. To give a professional
presentation to those companies and ensuring their commitment, also for the longer term, to
the FSR was what really attracted me. Making clear the special value of the FSR to the compa-
nies and the students is another really challenging aspect. Next to spending 5 days a week on
the FSR I spend a lot time on running and mountain biking. I’m really looking forward to the
next year, having the contacts with the companies, having a great time with my fellow board
members and learn a lot.
BAS LIPSHi, my name is Bas Lips and in the XIVth FSR board I will fulfil the position Commissioner
Finance Activities. Starting with Econometrics at the Erasmus University in 2008 and already
allowed to enter the masters, I decided to take a short break in studying. After a year in which
I organised the International Banking Cycle and participated in the International Research
Project, I knew the FSR board was the only right choice. Starting this year on common grounds
organising the IBC 2011, I am looking forward to organise all the challenging activities this
year has to offer.
ANNE VAN DRIESUMHi, my name is Anne van Driesum, I am 21 and I come from a small town called Zaltbommel.
After living there for 18 years it was time for a change and I moved to Rotterdam to study Eco-
nomics & Business Economics. Wanting to meet new people I became a member of the frater-
nity R.S.V. Sanctus Laurentius. Besides my study I have been active within several committees.
In my third year I went on exchange to Universidade Nova de Lisboa and it was then that I
decided that I would take a year off to further develop myself. Or rather a year ON...
Because this year I am getting the opportunity to fully commit myself to the continuity of the
FSR as the new Commissioner Activities. And I am lucky because I have two predecessors: Ellis
Heijboer and Kim de Vries. Besides the IRP 2012 I am also responsible for the FSR Forum and
the Female Business Tour. I am looking forward to a year full of new challenges and I am sure
that me and my fellow board members are going to make this year a year of successes!
FSR news • 53
The FSR is looking for enthusiastic committee members for the academic year 2011-2012. As a committee member you have the opportunity to distinguish yourself from other students and to get connected to the corporate world. Are you a Bachelor 3 or a Masters student the coming year and do you have affinity with finance, accountancy or controlling? Grab this chance to become an active member at the FSR in one of the following committees:
Accountancy Committee Finance CommitteeCorporate Finance Competition Committee FSR Forum Redaction CommitteeEuropean Finance Tour Committee International Banking CommitteeFAN Committee International Research Project Committee
Interested? Mail to [email protected]
WANTED: COMMITTEE MEMBERS
Committee_members.indd 1 20-7-2011 16:28:55
FSR Alumni AssociationThe value of the FSR alumni
In the financial world, valuating is one of the most import and also most difficult tasks. On the
one hand important since in for instance acquisitions it is vital to ascribe a clear value to an
object and in formulating corporate goals a value appreciation is often seen as a sign of man-
agement competence, while on the other hand difficult since numerous objects are hard to
value accurately and this allows a degree of subjectivity to enter the valuation which is often
hard to counter with the current most frequent used valuation methods. Although in financial
markets we rely on the market forces of supply and demand to establish a correct valuation, it
is much more difficult to obtain a good valuation in acquisitions of non-traded firms. In case of
firms with stable and clearly defined cash flows valuating is relatively easy, but in cyclical
industries day-to-day changes can have a huge impact on the value of a corporation. Especially
when future value increases are being estimated and already incorporated in the price to be
paid there is a big chance of overestimation of the true underlying value. The valuator can then
easily fall into the “winners curse”, a recurring problem in auctions of objects whose value is
difficult to estimate. The winner will be the person who ascribes the highest value to an object,
but when this value is higher than the intrinsic value there is overestimation and overpayment
and the bidder becomes the victim of the “winner’s curse”.
It is becoming more and more clear that sentiment plays an important role in valuations. We
saw this during the dot.com crisis at the turn of the century and more recently in the overvalu-
ation of the (US) housing markets. The fact that reputation of a seller can influence the price
to be paid counters rational economic thought and has led to re-evaluation of economic models
from prescriptive to descriptive in which human behavior is incorporated.
Valuating an organization like the FSR alumni is much more difficult as the value is not easily
captured in profit or loss numbers. No, the value of the FSR alumni lies within the members
and the bonds between them, which in certain times prove to be highly valuable. From an eco-
nomic perspective difficult to see, but for the members clearly observable at one of the alumni
events!
F.T. chairman FSR Alumni Association
Joris Kill
fsrforum • volume 13 • issue #5
FSR news • 55
The FSR is looking for enthusiastic committee members for the academic year 2011-2012. As a committee member you have the opportunity to distinguish yourself from other students and to get connected to the corporate world. Are you a Bachelor 3 or a Masters student the coming year and do you have affinity with finance, accountancy or controlling? Grab this chance to become an active member at the FSR in one of the following committees:
Accountancy Committee Finance CommitteeCorporate Finance Competition Committee FSR Forum Redaction CommitteeEuropean Finance Tour Committee International Banking CommitteeFAN Committee International Research Project Committee
Interested? Mail to [email protected]
WANTED: COMMITTEE MEMBERS
Committee_members.indd 1 20-7-2011 16:28:55
FSR Activity Agenda 2011-2012
September/October/November Big 4 CycleMeet the 4 largest accounting companies.
International Banking CycleThe investment in your career.
November Traders TrophyCan you handle the pressure?
Multinational DinerGet to know the leading Dutch multinationals.
Accountant Firms DayCreate your own goodwill!
Female Business TourIt might be a men’s world but it would be nothing
without a woman.
January/February Financial Business CycleExplore the financial opportunities.
February Young Financials DinerGet to know interesting financial companies.
March Multinational Battle Five multinationals, five battling cities, are you part of it?
European Finance TourMilan, managing uncertainties.
April/May National Investment CompetitionInvest and be a winner!
May Investment Banking MasterclassLearn to valuate, like an investment banker.
Bachelor Accountancy DayWill you choose accountancy?
Corporate Finance Competition Five star event: hotel, companies and participants!
International Research projectThe Asia Experience.
fsrforum • volume 13 • issue #5
56 • FSR news
Of heb jij een beter idee om aan je toekomst te sleutelen?
www.werkenbijpwc.nl
© 2011 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.
4694-34 PwC RC Adv. Sleutelen A4 FSR Forum.indd 1 7/11/11 9:02:22 AM
Weten wat je kan,begint met weten waar je naartoe wilt.
Inge TjeerdsmaSenior Staff Audit FSO
Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien én hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op ey.nl/carriere
E&Y_210x297mm_potentials.indd 1 03-11-10 17:11