ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

A Study on the Application of the Discount Rate for Firm Specific Risk Premium：Focusing on Size Risk Premium

  • Kim Jongil The Catholic University of Korea
  • Nam－Chul Jung Hongik University

Asian Tax Journal Vol. 23 No. 4 (2022), pp. 159-187

Abstract

This study investigates the process of reflecting the firm specific risk premium (FSRP) in the discount rate in valuation practice, and especially focuses on the size risk premium (SRP). Through this, this study intends to identify the current situation and problems in the application of discount rates used in valuation, and to suggest reasonable improvements. For the purpose of this study, in－depth interviews are conducted on valuation expert groups. The interview items mainly consisted of ① the discount rate used in valuation and general application procedure, ② whether and not SRP is applied and the procedures, ③ whether SRP is applied differentially according to the purpose of valuation, ④ factors to be considered when calculating SRP using Korean data, ⑤ consideration of FSRP in the discount rate. As a result of the interview, valuation experts at all interviewed institutions used the Market Risk Premium (MRP) provided by Bloomberg as a MRP of discount rate for valuation. Of the 7 interviewed institutions (4 BIG4 accounting firms and 3 Non BIG4 accounting firms), 4 were applying SRP normally, 2 did not, and 1 applied it depending on the situation. Experts from all interviewed placed importance on the request for submission of data from supervisory agencies and the presentation of evidence in the future. Non BIG4 accounting firms, which perform relatively large number of valuations for financial reporting purposes, mainly consider the consistency of SRP application. Most of them agreed on the need to calculate SRP using domestic data, but various opinions were presented on detailed matters such as consideration of the listed market to which they belong and whether or not delisted companies were included. On the other hand, various opinions and practical examples such as liquidity, control, and initial business risk application were presented for FSRP other than SRP. This study suggests that practical diversity is high in applying the discount rate of FSRP, including SRP, suggesting that differences in valuation results depending on valuation institutions may be important. Accordingly, public institutions need to distribute research data for quantifiable SRP and FSRP to reduce practical diversity.

Keywords

  • size risk premium
  • valuation
  • discount rate
  • firm specific riks premium
  • size effect

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Asian Tax Journal

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