BV551 Company-Specific Risk: Identification and Quantification

Webinar Description

Common practice among practitioners in estimating discount rates has evolved into searching databases for guideline public companies (GPCs) and selecting a median as representative of the appropriate beta for a subject company, often without investigating that drive differences among the estimated betas and then applying a unsupported company-specific risk premium. This webinar will investigate reasons for differences in beta estimates among GPCs and how studies can be used to adjust observed beta estimates  for characteristics of the subject company that differ from the GPCs. The goal is to understand differences and how market betas differ because of  those differences. We will examine empirical data on non-beta company risk differences, how market returns reflect those differences, and how that data can be used to adjust discount rates for risk differences. We will also  review recent literature of company-specific risk factors and how differences in those risk differences impact empirically observed prices and expected returns. Finally, we will review practical steps that can be taken in developing company-specific rates of return.

Learning Outcomes

Upon webinar completion, the participant will be able to:

• Identify differences in risks among guideline public companies (GPCs) in same industry; 
• Analyze adjustments to GPC beta estimates for various risks; 
• Develop adjustments to GPC beta estimates to better match the risks of a subject closely held/non-publicly traded business; 
• Interpret research on company-specific risk factors priced by the market; and
• Integrate these factors into a work plan to improve estimates of discount rates.

Course Audience

Valuation practitioners and analysts who develop discount rates for valuing closely held/non-publicly traded businesses

Recommended Pre-Readings

(1) Valuing a Business 6th Edition. “Estimating the Discount Rate for Smaller Closely Held Businesses,” Chapter 11, online appendix Valuing a Business (here)
(2) Feldman, Stan and Todd, “Understanding the Firm Specific Risk Premium,” Journal of Business Valuation and Economic Loss Analysis 18 (1): 1-22
(3) Cooper, Lauren A., James A. DiGabriele, Richard A. Riley, Jr., Trevor L. Sorensen, “Company-Specific Risk and Small Company Valuation,” Journal of Forensic Accounting Research Vol. 6 (1) (2021): 33-56

Instructor Information

Roger J. Grabowski, FASA | Kroll LLC

Roger J. Grabowski, FASA, Managing Director (ret.) at Kroll LLC, in the Valuation Advisory Services practice. Roger is a co-developer of the annual Risk Premium Report – Size and Risk Studies for estimating cost of equity capital.   Roger was lead editor and contributing author of Shannon Pratt’s The Lawyer’s Business Valuation Handbook 3rd ed. (ABA, 2024), and co-editor and  contributing author of Shannon Pratt’s Valuing a Business – The Analysis and Appraisal of Closely Held Companies 6th ed. (McGraw-Hill, 2022). Roger is co-author of Cost of Capital: Applications and Examples 5th ed. (Wiley, 2014) and The Lawyer’s Guide to Cost of Capital (ABA, 2014); contributing author to The Art of Valuation: Reflections, Stories and Strategies from Business Appraisal (The Appraisal Foundation, 2023), of Chapter 17, “Discounts Rates in Theory,” in Lost Profits Damages: Principles, Methods and Applications 2nd ed. (Valuation Products and Services, 2022); and author of many articles, the most recent being “Comparing Growth Rates Used in Discounted Cash Flow Valuations” (Business Valuation Review, 40 (1) 2021). 

Continuing Education

Review of this session recording will award 1.8 CE hour(s). 

CPE credit is not awarded for this pre-recorded offering.