About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

38 Managerial L. 1 (1996)

handle is hein.journals/ijlm38 and id is 1 raw text is: Company Valuation:
A Comparison of Economic and Legal
Perspectives
by Alan Gregory, Professor of Accounting and Finance, University of Glasgow
and
Andrew Hicks, Department of Economics, Department of Law, University of
Exeter
Abstract
This article reviews the way in which the law in England and Wales considers
the valuation of companies, and argues that the issues arising from this legal
perspective are indicative of a gap between the economic theory and practice of
company valuation. Furthermore, an analysis of the relevant case law reveals
several interesting practical difficulties which may suggest a role for theoretical
analysis. Equally, a lack of awareness of the economic theory of valuation is
revealed on the part of the courts. It is argued that this lack of awareness may
have implications for the practices of valuation by professional accounting firms
that are currently observed in the UK.
An examination of the theory of company valuation shows that there is
widespread agreement on the basic principle of the approach to be followed in
valuing the shares in a company; in short, it is the present value of the company's
future cash flows. Although there is debate over issues such as the appropriate
model to be used in pricing risk, and how to allow for the impact of taxation
in arriving at the discount rate, this principle appears to be universally accepted.
Although some investigations have been carried out into the practical context
of company valuation in the UK (Arnold and Moizer 1984, Moizer and Arnold
1984, Day 1986, and Keane 1992), no attention has been paid in the economics
and accounting literature to the legal context. This is perhaps surprising given
that the courts are sometimes important users of company valuation reports.
This article reviews the way in which the law in England and Wales considers
the valuation of companies, and argues that the issues arising from this legal
perspective are indicative of a gap between the economic theory and practice of
company valuation. Furthermore, an analysis of the relevant case law reveals
several interesting practical difficulties which may suggest a role for kheoretical
analysis. Equally, a lack of awareness of the economic theory of valuation is
revealed on the part of the courts.
Historically, one of the features of the English commercial courts has been
their refusal to become involved in matters of commercial judgement. English
judges have held themselves to be sophisticated technicians in law but self-
professed amateurs in commercial matters.' Their role has been to hear expert
witnesses and to weigh up their professional advice. This contrasts with the
position in continental courts; for example in France, the judges sitting at first

Volume 381/umber 1 1998                                                                                                1

Volume 38 Number 11996

1

What Is HeinOnline?

HeinOnline is a subscription-based resource containing nearly 3,000 academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline with pricing starting as low as $29.95

Contact us for annual subscription options:

Already a HeinOnline Subscriber?

profiles profiles most