The Valuation of Cash Flow Forecasts: An Empirical Analysis




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    • Graduate School of Business, University of Chicago and National Bureau of Economic Research (NBER), and Harvard Business School and NBER, respectively. Lori Kaufman, Betsy McNair, and Kelly Welch provided able research assistance. Yacine Ait-Sahalia, Willard Carleton, Eugene Fama, Wayne Ferson, Anthony Lynch, Thomas Lys, Wayne Mikkelson, Mark Mitchell, Kevin M. Murphy, Daniel Nelson, Mitch Petersen, Nick Poison, Art Raviv, Jay Ritter, Joe Rizzi, René Stulz (the editor), Theo Vermaelen, Robert Vishny, an anonymous referee, and seminar participants at Arizona, Harvard, Illinois, the NBER Summer Institute, North Carolina, Northwestern, Oregon, Vanderbilt, Washington, and the University of Chicago provided helpful comments. This research was supported by the William Ladany Faculty Research Fund, the Center For Research in Security Prices, the Lynde and Harry Bradley Foundation, the Olin Foundation (Kaplan), and the Division of Research at Harvard Business School (Ruback). Address correspondence to Steven Kaplan at Graduate School of Business, University of Chicago, 1101 East 58th St., Chicago, IL 60637.


This article compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios.