The role and appropriateness of different valuation methods: A systematic literature review

Abstract

Valuation methods are used for a plethora of different reasons within the financial world. Besides their widespread use in decisions on mergers and acquisitions, valuation methods are used for the allocation of resources, estimating the value of equity for investors, financial decisions and bond offerings, and taxation purposes, amongst others. All valuation methods have their strengths and weaknesses affecting the accuracy of the estimation generated, and the appropriateness of the specific valuation method chosen depends on the circumstances surrounding the valuation. Scholars found that different valuation methods yielded materially different values when utilised in the valuation of the same entity. Given the importance of valuations and their influence on decision making within entities, proper guidance is needed to ascertain when the different valuation methods may be deemed appropriate. In pursuance of the aforementioned, this study evaluated the literature published on valuation methods from 2019 to 2023 and conducted a systematic literature review. Including only published journal articles to maintain the quality of the literature studied, 36 journal articles were selected for final inclusion and analysed. ATLAS.tiTM,, a qualitative data analysis software, was used to codify, group and analyse the data. The results indicated the following: Asset-based valuation methods are more appropriate when companies are experiencing economic distress; in establishing a minimum or liquidation value; and in industries commonly having a greater share of fixed assets. Differing opinions towards Asset-based methods' appropriateness in the valuation of start-up entities are found. Discounting methods find difficulty in valuing start-up entities; more so in the e-commerce industry; or companies in times of economic distress or business rescue. The Discounted Dividend (DDM) method is less appropriate in multi-segmented firms whilst the Economic Value Added (EVA) method could be ideal in multi-segmented firms. The Residual Income Valuation (RIVM) method is ideal when companies have high levels of intangible assets. Valuation multiples are ideal for valuing larger, profitable firms; minority shareholding; firms with multiple business units and, given that the correct multiples are chosen, start-ups in the e-commerce industry. Furthermore, we conclude that EBITDA and Price/Earnings multiples are favoured in emerging markets; EBITDA multiples found favour in valuing individual business units and Price/Book multiples generate less biased estimations than that of Sales multiples. We concluded that further research is needed to conclusively determine when the various methods should be deemed appropriate. This study contributes to the existing body of literature on the topic of valuation methods and seeks to provide practitioners with useful guidance as to the appropriateness of different valuation methods within various contexts and the implementation thereof. Furthermore, this study seeks to highlight the adjustments made by scholars to the methods to increase the appropriateness of the methods and increase the accuracy of the value estimations derived.