An Empirical Research On Grey System Theory In Business Valuation Using Market Approach

As an important method to do business valuation, market approach is widely used in European counties and America, but in our valuation practice valuers normally employed cost approach and income approach to do business valuation. And the crucial point using market approach to do business valuation is how to choose comparable companies as references then quantify and adjust every important difference or parameter between the target company and comparable ones, which is directly related to the final valuation result. Presently, however, there are little researches or papers dedicated to find a quantitative standard to choose comparable companies as references in this world, and the description for the selection of comparable companies in our country is, I quote, similar category and function with the target company, and proximate trading time and trading conditions. But the conception of “similarity” or “proximity” itself is not a clear and specific standard and hard to quantify, which makes valuers in practice normally choose comparable objects according to his or her own subjective judgment or experience, and that may easily cause the valuation result deviate from the actual situation, if taking both subjective factors and accidental factors of personnel into consideration.Therefore, this paper is trying to use grey correlation degree to measure the degree of similarity or proximity between comparable companies and valued company, and then give each of them a unique weight in the calculation of final result of valuation based on this observation. To be more specific, this paper, focusing on business valuation for public companies, will overview the present research situation on the market approach doing business valuation or related, both home and abroad. And the most encouraging finding is using the degree of closeness to measure the proximity between two objects. Then it will introduce the concept of grey correlation analysis and its applicability among business valuation. And then, this paper is about to establish a new type of valuation index system and grey correlation model. Eventually, a proper case to verify this method in business valuation will be given.