Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/309534 
Year of Publication: 
2023
Citation: 
[Journal:] Credit and Capital Markets – Kredit und Kapital [ISSN:] 2199-1235 [Volume:] 56 [Issue:] 3-4 [Year:] 2023 [Pages:] 389-418
Publisher: 
Duncker & Humblot, Berlin
Abstract: 
The objective of this paper is to analyze the suitability of the Total Market Return approach within the requirements of the capital asset pricing model, and for the purpose of business valuation, particularly in light of its endorsement by the institute of German auditors (IDW). First, we question the use of the total market return approach on a theoretical basis. Then, we analyze whether total market returns influence the institute's recommendation for the market risk premium in a meaningful way and show the implications of a rigorous application for a large sample of valuation reports authored by German auditors. Our results reject the suitability of the Total Market Return approach for the purpose of business valuation on theoretical grounds, show that its rigorous application would have led to much lower company valuations, and highlight the necessity of revising the reasoning behind the recommended bandwidth of market risk premia.
Subjects: 
Market risk premium
Total market return
Company valuation
Discounted cash flow
JEL: 
G12
G32
G34
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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