Appraisal Rights and Economic Growth

摘要

In disputes relating to valuation where there is reason to doubt the fairness of deal price, the courts prefer the discounted cash flow (DCF) method and the capital asset pricing model (CAPM). Under this approach the standard practice is to calculate value year-by-year for the coming five years (the projection period), to use projected average cashflow to calculate value for the period thereafter (the terminal period), and to sum the two. Because cashflow differs from GAAP earnings primarily by netting out funds reinvested in the firm (plowback), future returns can be expected to grow. Thus, one must adjust for expected growth during the terminal period, which is typically accomplished by reducing the discount rate by the projected inflation rate plus the GDP growth rate, because a firm must keep up with inflation (lest the firm disappear over time) and because economic growth comes from returns generated by business. But if plowback generates return at the same rate ordinarily required of the firm, growth in value will be equal to plowback. Thus, it would be simpler to use projected GAAP earnings as the measure of return for the terminal period without any adjustment to the discount rate. To use cash flow together with an adjusted discount rate is akin to making Maraschino cherries—which are first soaked in lye to remove color and flavor and then soaked in food coloring and sugar to put it bach. The question is whether long-term growth in firm value is limited to growth from plowback. There is good reason to think that it is so limited because opportunities to generate above normal returns (economic rents) are likely to dissipate because of competition. Still, it is possible that firms do grow by more than can be explained by plowback. But data are to the contrary. Since 1930, S&P 500 growth can be fully explained by plowback (GAAP earnings less dividends) together with likely reinvestment by investors. Although plowback during this period has been just enough to match inflation, remaining growth in stock prices is slightly less than would be expected by dividend reinvestment, which is consistent with diversion of some portion of dividends to consumption. The data since 2000 are somewhat different in that plowback has been less than inflation, but stock prices have nonetheless increased consistent with reinvestment. The bottom line is that real stock prices seem to grow at a rate slightly more than the real GDP growth rate but a bit less than the plowback rate plus the likely reinvestment rate. It follows that there is no reason for stockholders to expect growth at any greater rate and thus no need for courts to struggle with estimating growth rates: By using projected GAAP earn-ings as the measure of average long-term return, the courts can use an unadjusted discount rate to calculate terminal value.