Thethirdistoleavethevalueasisbutattributethedifference
betweenthevalueweestimateandthevaluewethinkisthe
rightonetoaqualitativefactorsuchassynergyorstrategic
considerations. This is a common device in acquisition
valuationwhereanalystsareoftencalledupontojustifythe
unjustifiable. In fact, the use of premiums and discounts,
where we augment or reduce estimated value, provides a
window on the bias in the process. The use of
premiums—control and synergy are good examples—is
commonplace in acquisition valuations, where the bias is
toward pushing value upward (to justify high acquisition
prices). The use of discounts—illiquidity and minority
discounts,forinstance—aremoretypicalinprivatecompany
valuationsfortaxanddivorcecourt,wheretheobjectiveis
often to report as low a value as possible for a company.
What to Do about Bias
Bias cannot be regulated or legislated out of existence.
Analysts are human and bring their biases to the table.
However,thereareseveralwaysinwhichwecanmitigatethe
effects of bias on valuation:
- Reduce institutional pressures. As we noted earlier, a
significantportionof bias canbe attributedto institutional
factors.Equityresearchanalystsinthe1990s,forinstance,in
additiontodealingwithallofthestandardsourcesofbiashad
tograpple withthedemandfromtheir employersthatthey
bringin investmentbankingbusiness.Institutionsthatwant
honest sell-side equity research should protect their equity
research analysts who issue sell recommendations on
companies,notonlyfromiratecompaniesbutalsofromtheir
own salespeople and portfolio managers.