Financial Analytics: Science and Experience

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Analysis of manipulations when applying the income approach method to valuation

Vol. 12, Iss. 3, SEPTEMBER 2019

Received: 26 February 2019

Received in revised form: 16 March 2019

Accepted: 31 March 2019

Available online: 30 August 2019


JEL Classification: C13, G12

Pages: 338–351

Bogatyrev S.Yu. Financial University under Government of Russian Federation, Moscow, Russian Federation

Subject The article discusses distortions in the process of valuation under the income approach.
Objectives The aims of the study are to identify the main errors and demonstrate abuses in applying the income approach to valuation, to present methods for revealing such situations and preventing the distortion of cost.
Methods The study employs methods of analysis and synthesis, formalization in identifying and describing errors in valuation. I determine the degree of formalization of the problem and apply logical methods of research. I carry out logical formalization of instances of valuation process distortion, using the income approach.
Results The paper presents mechanisms to avoid mistakes and prevent abuse in the valuation under the income approach. It shows the scope of application of modern information systems in correcting improper valuation. The findings may be useful for analysis of valuation reports, cost analysis, recommendations on investing in the stock market.
Conclusions At present, there are many instances of involuntary error in reports and fraudulent misrepresentation of valuation results through data manipulation. The described cases of such behavior of some appraisers, ways to reveal such situations, and offered measures to adjust appraisal procedures may help cost analysts, appraisers, and users of valuation reports get clear understanding of cost and create an objective base of economic indicators to make proper management decisions.

Keywords: income approach, discount rate, modified capital asset pricing model, cumulative discount rate, cash flow


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