Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

NOTES

1. The number of restricted shares that can be sold by an individual during any three-month window is limited to the greater of either 1 percent of the shares outstanding or the average weekly trading volume in the security calculated over the four calendar weeks preceding the week the notice of sale is filed.

2. Earlier studies include Hertzel and Smith (1993), Silber (1991), and Wruck (1989).

3. We used historical volatilities calculated from daily returns largely for convenience (because daily returns are readily available).

4. For instance, in the CRSP database, the closing prices or the bid–ask averages at the close are reported for all publicly traded stocks.

5. The names have been changed to maintain confidentiality, but the facts of the case are largely unchanged.

6. In addition, reported trading volume for NASDAQ stocks was overstated at this time because of dealer participation on one side of most trades, so Elite Financial stock was actually even more thinly traded than these volumes indicate. See Anderson and Dyl (2005, 2007).

7. The other variables in the Bajaj et al. (2001) study are percentage of shares issued, the company’s Z-score (a measure of the financial health of the company), and an indicator variable equal to 1.0 if the shares are registered. To apply the regression to the Elite Financial shares, we used the average values for the sample for the first two variables. We assumed that the shares were unregistered, we rescaled the coefficient on the standard ...