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Organismo Italiano di Valutazione (OIV) hosted their 7th Annual OIV Business Valuation International Conference on November 12, 2018 at Bocconi University in Milan, Italy.
As an authority on Cost of Capital estimation, Roger Grabowski, Managing Director, Duff & Phelps, delivered his presentation on Size Effect. Roger was interviewed by Professor Mauro Bini, the Management Board’s Chairman of OIV, for key takeaways from his presentation.
“We often don’t understand why there is a Size Effect and when it should be applied,” says Roger. At the basis of Roger’s presentation is background theory and empirical evidence proving that the Capital Asset Pricing model is flawed.
Thus, the foundation of the Size Effect is grounded in the flaws from the Capital Asset Pricing model. “The Size Effect is a correction for these flaws,” Roger goes on to explain, “We find it both in the data for the U.S. and in European economies.” The Size Effect is applicable in the U.S. and in Europe to different degrees.
When questioned whether using the Fama-French model to solve the limitations of CAPM is a good solution, Roger points out that this too is flawed.
“The Fama-French model does not have a bridge between accounting data and market data,” says Roger. While the Fama-French model is defined relative to market values of public companies, we are more often dealing with the valuation and estimation of cost of capital relating to non-public companies.
View the full interview here.