Valuation of Unquoted Shares in
the U.S. Financial Accounts
Prepared by Susan Hume McIntosh
and Erik Johnson
Taskforce on the Valuation and
Measurement of Equity
April 14, 2005
Statistics Canada, Ottawa
Relative Importance of Unquoted
Shares
Not a major issue in U.S.
Vast majority of mid-size and nearly all large
U.S. corporations have publicly traded
shares.
Unquoted shares at year-end 2003 estimated
at only 12% of the total market value of
equity of domestic corporations.
2
Current Valuation Method
Annual data from estate tax returns.
Gives split between closely held stock
(unquoted shares) and publicly traded shares
(including mutual funds).
Assume same ratio of unquoted to publicly
traded shares for aggregate household
sector.
3
Advantages
Estate tax data specifically reports on
unquoted shares.
Method ties this value of unquoted shares to
a market value of quoted shares.
4
Disadvantages
Incentive to have low value on unquoted
shares to hold down estate taxes.
Only estates over $1.5 million must file.
Threshold rising.
Assumes aggregate household sector holds
same proportion as wealthy decedents.
5
Method Proposed by WGUS
Use balance sheet information and equity
market valuations for publicly traded
corporations to estimate median market-to-
book ratios by industry.
Book value of own funds = paid-in capital
and accumulated retained earnings.
Apply industry market-to-book ratios to own
funds of non-publicly traded corporations
(S-corporations).
6
Aggregation of Closely Held Equity
(Exhibit 1)
Market value of S-corps
+ Market value of private C-corps
+ Leveraged buyouts (LBOs)
(quoted to unquoted)
- Initial public offerings (IPOs)
(unquoted to quoted)
--------------------------------------------
= Market value of closely held equity
(unquoted)
7
New Valuation Method: S-corps
(Exhibit 2)
• Used IRS Statistics of Income (SOI) tax data.
• Latest annual tax data available is for 2001.
• For 2001, 2.9 million returns, $1.8 trillion in
assets, $535 billion in stockholders’ equity.
• Divided into 14 industries.
• 2001 growth rate of stockholders’ equity
used for 2002-2004.
• Linear interpolation of annual stockholders’
equity to obtain quarterly values.
8
New Valuation Method: S-corps
(Exhibit 2)
Calculate market value to stockholders’
equity for public companies for the 14
industries quarterly from 1996-2004 from
Compustat data.
Use the median market-to-book ratio.
S-corps stockholders’ equity
x Median market-to-book ratio of public corps
= S-corps market value
9
New Valuation Method – C-corps
(Exhibit 3)
List of private C-corps with greater than $1
billion in revenue from Forbes magazine.
Find a comparable public company by
matching industry and revenue with each
private C-corp.
Compute market-to-revenue ratio for
comparable public company.
Revenue of private C-corp
x Market-to-revenue ratio of public company
10 = Market value of private C-corp
New Valuation Method – C-corps
(Exhibit 3)
For 2003, 281 private C-corps with revenues
greater than $1 billion.
Able to obtain the Forbes’ list back to 1996.
Will still miss smaller private C-corps.
Only information available in Forbes is
revenue, industry classification, and number
of employees.
No balance sheet information on private C-
corps is available.
11 Matching of companies is time consuming.
Leveraged Buyouts and
Initial Public Offerings
Leveraged Buyouts (LBOs)
– Corporations converting from public to private.
– Data from Securities Data Company.
– Market value of LBOs calculated as
Last public price x number of shares outstanding
Initial Public Offerings (IPOs)
– Corporations converting from private to public.
– Data from Securities Data Company.
– Market value of IPOs calculated as
Initial market price x number of shrs. outstanding
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