Company-Specific Risk and Small Company Valuation

James DiGabriele, Professor in the Accounting and Finance Department, recently had his co-authored paper “Company-Specific Risk and Small Company Valuation,” featured in Business Valuation Update, a highly regarded practitioner journal.

This study explores how the characteristics of private company transactions influence capitalization rates, industry risk premiums, and company-specific risks in private firms. The findings of this research conclude that company-specific risk accounts for at least 50 percent of the capitalization rate. The industry risk premium represents less than 2 percent of this capitalization rate. However, it plays a crucial role in shaping company-specific risk. Additionally, the study identifies several transaction features related to private companies that are linked to company-specific risk. These insights are pivotal for enhancing the understanding of capitalization rates and company-specific risks in private company valuations. These findings can assist both practitioners and academics in more accurately assessing the cost of capital for private firms.