Factors influencing premiums and discounts for control in assessing the value of a business

Abstract

The issues of establishing the amounts of premiums and discounts for control in determining the value of a shareholding and the factors influencing this are among the fundamental problems of business valuation. This is due to the fact that the amount of control premium can significantly affect the market value of an evaluated business or a shareholding. The relevance of this paper lies in the fact that the results obtained in the course of the study can be used to further deepen the understanding of the influence of the degree of control on the valuation of a business (valuation of a shareholding), its characteristics, and factors affecting the size of the control premium. This contributes to the improvement of methods for assessing the value of companies in emerging investment markets, including the Latvian market. The research methodology used in this paper starts with a literature review to shed light on main controversial issues of the phenomenon stressed out in the previous studies. Due to empirical nature of the paper, generally accepted methods of economic research were used including comparative analysis and synthesis. Thus, the methodological basis of the study is the analysis of the literature sources, synthesis and comparison of statistical information. The purpose of the paper is both to determine the factors affecting the amount of a control premium and to analyse their magnitude, using data from empirical studies conducted in this area by various authors for the period from 1968 to 2018. Therefore, the analysis aims to address the issue of determining the volume of premiums and discounts for control when assessing the value of a business. The conducted study has shown that a premium for control can significantly increase the value of a business or a shareholding being sold (by 7% - 82%). At the same time, the lack of control leads to the application of discounts when assessing the value of a business and their size can also vary from 7% to 82%. The authors' recommendations are addressed to business owners in emerging markets and are aimed at focusing efforts towards improving key indicators that affect the value of a possible control premium. These are such indicators, as: the degree of concentration of the share capital of the evaluated company; the financial status and financial performance of the company; making use of differences in country legislation governing shareholder rights; the presence of competition for the purchase of a particular company; the presence of a system and voting procedure established in the company.