We came across an interesting paper on size premium by Clifford Ang, where Ang argues against adjusting a cost of capital for the size premium, citing empirical evidence and inconsistencies that challenge its validity. Ang is an author of several finance textbooks and articles, contributing significantly to the field of valuation and economic analysis –… Continue reading Why We Should Not Add a Size Premium to the CAPM Cost of Equity
The fallacy of applying a ‘standard’ control premium
This is an update of an article by Stephen that appeared as a Perspective on the website of Chartered Accountants Australia + New Zealand in 2021[1]. We often observe takeover premium data or studies (mis)used in valuations, the rote application of ‘standard’ control premiums to comparable company multiples and in determining minority interest discounts. However,… Continue reading The fallacy of applying a ‘standard’ control premium
KISS principle
In our first post, we noted that one of the main counter arguments against a size premium is the more recent empirical research which suggests the size premium has disappeared since the mid 1980’s when it was first “discovered”. We also discussed the three broad strands of research into a size premium. Jan Loeys is… Continue reading KISS principle
Size premium #3: some examples
[5 minute read] [October 2023] Introduction Our previous post outlined a four-step process for incorporating the impact of size into a valuation. The four steps were: [1] Generate base case DCF model which explicitly incorporates the impact of being small on cash flows, growth rate and Weighted Average Cost of Capital; [2] Assess downside scenario… Continue reading Size premium #3: some examples
Size Premium #2: How to incorporate the impact of size into a valuation.
[15 minute read] [July 2023] Our first article addressed the merits of adjusting the discount rate to account for a size premium. We caution against this approach. The justification for a size premium is essentially based on evidence that smaller firms have earned higher returns. In reality, this empirical evidence is mixed, with measured size… Continue reading Size Premium #2: How to incorporate the impact of size into a valuation.
THE SIZE PREMIUM IN AUSTRALIA
Authors: Stephen Reid and Tony Carlton Stephen is a partner in Deloitte’s Mergers and Acquisitions valuation team and an Adjunct Professor at Macquarie University, based in Sydney. Tony is a corporate finance advisor and educator, formerly an Associate Professor in Macquarie University Business School The appropriate treatment of a (small) size premium (or valuation discount)… Continue reading THE SIZE PREMIUM IN AUSTRALIA