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EDHEC Financial Analysis and Accounting Research Centre : Programmes
The EDHEC Financial Analysis and Accounting Research Centre studies company valuation. Cultural and technological changes now make it possible to use multiple dynamic analyses, the cornerstone of which is the discount rate. There is an abundance of academic research into the determination of the discount rate, but the gap between academe and business seems to be growing wider by the day. In practice, those who do the valuations often oversimplify, invalidating their reasoning; they may even ignore theory and transform the discount rate into a black box to hide the absence of objective and academic foundations in the determination of the risk premium and of beta.
The objective of the EDHEC Financial Analysis and Accounting Research Centre is to call into question certain financial paradigms, in particular that which consists of separating idiosyncratic riskbecause it is diversifiablefrom the risk premium to provide the financial markets (financial analysts, investors, companies, rating agencies, auditors) with new light on the discount rate and to recommend new ways to determine it. To do so, five research programmes have been set up:
Determination of the cost of capital
This programme is the foundation of the Financial Analysis and Accounting Research Centre. It monitors the discount rate. Indeed, the aim of this programme is to review academic theories on the cost of capital and, in an attempt to understand the reasons for which they are not used in practice, point out the drawbacks of each. The goal is to create an EDHEC valuation model that reconciles academic and operational demands.
Impact of IFRS on company valuation
The ideology of the Centre is that company valuation should incorporate an operational risk premium that includes a systematic accounting risk that should be emphasised more greatly by IFRS demands for the qualification and quantification of risk. In this respect, the aim of the programme is to call into question the financial paradigm that separates idiosyncratic risk from the risk premium and thus to contradict the dogma according to which international reporting standards are neutral with respect to the perception of risk; instead, our work shows that there is an impact either on the financial aggregates analysts base their work on or on the strategy used by companies to counter the accounting effect.
The first study done by this programme, entitled The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies and undertaken in conjunction with the EDHEC Risk and Asset Management Research Centre, was sponsored by AXA IM and presented at the European Parliament in Brussels as well as in Paris and London, at round tables and conferences involving insurance professionals and European regulatory authorities.
Corporate governance, valuation, and cost of capital
In recent years, the subject of this research programme has been a recurring theme in valuation as done by the financial community. In general, analysts operate intuitively when, in view of the quality of corporate governance, they make adjustments to the discount rate. We want to bring greater scientific rigour to this practice.
The first study in this programme is sponsored by Décathlon and deals with optimising the financial structure of family companies, the cost of capital, and valuation. As it happens, the particular features of family companies invalidate many of the findings of modern financial theory, in particular with respect to the analysis of company performance, of governance systems, of financing structures, and of investment policy.
Impact of regulation for outside appraisals on company valuation
This research programme deals with the growing use of outside financial valuations. Regulation on the independence of the valuation has been the object of intense work on both sides of the Atlantic, and the mission of this programme is to look into the real transparency, objectivity, and efficiency of the independence of financial valuations, in particular in the context of fairness opinions. This research programme involves international comparisons in an attempt to identify the impact of fairness opinions on valuation and on corporate governance.
In France, for instance, in late 2006, the AMF redrafted regulations dealing with outside appraisals to create the status of independent financial appraiser; these new regulations make provisions for instances of compulsory and recommended use of fairness opinions. This reform is part of a larger regulatory move to protect minority interests. As a result, this regulation could strengthen boards in their valuation missions.
Impact of risk management on company valuation
Initially, this programme focuses on the definition of the concepts necessary for the implementation of a rigorous method for measuring risk-adjusted capital, value creation (a function of RoRAC and of the cost of capital), and optimisation of the allocation of business unit equity. It is our aim to build on this definition of concepts to improve the current performance measurement tools by complementing them with measures of risk management.
The use of these measures should have an impact on both the disclosures made to investors and on in-house performance management.
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