FSR Forum 13-5

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


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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


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.



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



»

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



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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


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


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);


verting into free-trading shares in four to six months (91

to 183 days);


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.



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.



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


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



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.


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.



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.


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.


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


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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.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.


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


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


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!


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:


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


FSR news • 41


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


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.


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.


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


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.


50 • FSR news

Accountancy - Belastingen - Advies

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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.


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


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.


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

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FSR Forum 13-5

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