Abstract

This paper is motivated by the recent concern raised by the SEC and other Securities Commissions around the Globe that financial analysts are not impartial. The question addressed is whether expert valuations provide unbiased information to shareholders and other stakeholders, and contribute to full disclosure. We examine the added value of expert valuations and their relationship to insider holdings based on a unique sample of 44 closely held companies listed on the TASE that were appraised by financial experts for transactions outside of the Exchange. These valuations are part of the full disclosure requirements in the case of extraordinary transactions. Each expert valuation is assessed on the basis of pre- and post-valuation data. Our key findings are: (1) expert valuations are 29% higher than market values and significantly affected by insider holdings; (2) there is a systematic upward bias in cash flow and cost of capital figures projected by experts; (3) expert valuations are not impartial; while they are supposed to provide an independent expert opinion, they are in fact biased towards majority shareholders who hired them to value the firm; (4) in the short-run investors respond cautiously to expert valuation; in the long-run, however, the over-valuation appears to be followed by destruction of value that is related to the firm's ownership structure.

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