Introduction

Abstract

The accurate valuation of companies is of fundamental importance for investors, analysts, underwriters, managers and many others. Capital market participants, for example, make an enormous effort to value firms and identify undervalued stocks. Managers are constantly relying on accurate valuations in order to create shareholder value. For example in M&A transactions, their offer price needs to be close below the intrinsic value of the target in order to outbid competitors and still create shareholder value. At the same time, they face the danger of paying too much. Accounting standard setters such as the Financial Accounting Standards Board (FASB) or the International Accounting Standards Board (IASB) try to support accurate valuations by improving the ability of the financial reporting system to provide information about the amount, timing and uncertainty of future payoffs. Finally, researchers seek to understand and improve the process of price discovery at the capital market. There is a large literature developing, testing and comparing valuation models and models of risk and return. In addition, there is a large literature which investigates the properties of forecasted future payoffs and how these may be improved. Clearly, society spends a lot of effort to achieve accurate valuations of firms.