Valuation: The State of the Art

There is a pervasive skepticism about formal valuation models, so much so that practitioners often discard them, preferring rough-cut methods such as pricing on the basis of comparables or simple P/E ratios. This paper provides a critique of standard valuation models, identifying what is being captured (and what is not being captured) in these models. The paper then strives to develop an agenda towards more robust valuation. It stresses three points. First, any valuation must be in accord with the well-established theory of finance. However, second, the valuation must also be practical. Both are important wedges in driving a solution. Third, valuation is a matter of accounting; a valuation model is only as good as the accounting that it involves. The last point is the basis for a critique of IFRS accounting.