Paradigm Shift in Finance: The Transformation of the Theory from Perfect to Imperfect Capital Markets Using the Example of Company Valuation
Abstract
:1. Introduction
2. Philosophy of Science Explanation: Paradigm Shift
- normal scientific phases, which are characterised by a certain paradigm;
- subsequent crises, in which the paradigm loses its scientific recognition due to anomalies;
- scientific revolutions, in which a paradigm shift finally occurs.
3. Obstacles to a Paradigm Shift in Capital Market Theory
3.1. Dominance of the Neoclassical School in Teaching
3.2. Dominance of the Neoclassical School in Research
3.3. Establishment of Modern Capital Market Theory in Practice
3.4. Transparency and Comprehensibility of Capital Market Models
3.5. Denying Weaknesses of Modern Capital Market Theory
4. Drivers of the Paradigm Shift in Capital Market Theory
4.1. Legal Emphasis on Risk Analysis and Risk Aggregation as Part of Business Valuation
4.2. Improved Data Situation for Risk Analysis
4.3. Legal Concerns about “Traditional Valuation Methods” Based on Perfect Markets
4.4. Findings of Empirical Capital Market Research on the Failure of Financial Valuation Approaches (CAPM)
“In effect, the paradigm of the CAPM and efficient markets may need to be replaced with a paradigm of markets as vulnerable to capricious behavior”.
4.5. Changes in the Economic Fundamentals Due to Global Crises
4.6. Inability of Modern Capital Market Theory to Take Transaction Effects into Account
4.7. New Valuation Methods Available
4.8. Model Error and Liability Risk When Ignoring the Risk of Insolvency
4.9. Missing Strategy Assessment with the Capital Market-Oriented Valuation
5. The Simulation-Based Valuation as a Result of the Paradigm Shift
5.1. The Concept of Simulation-Based Business Valuation
5.2. Advantages of a Simulation-Based Business Valuation
5.2.1. Using Unbiased Planning
5.2.2. Considering Corporate Risks in Corporate Planning
5.2.3. Considering the Insolvency Risk in the Company Valuation
5.2.4. Deriving a Risk-Adjusted Discount Rate (Cost of Capital Rate) Directly from the Simulation Results
5.2.5. Preparing Entrepreneurial Decisions
6. Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Acknowledgments
Conflicts of Interest
References
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Ernst, D.; Gleißner, W. Paradigm Shift in Finance: The Transformation of the Theory from Perfect to Imperfect Capital Markets Using the Example of Company Valuation. J. Risk Financial Manag. 2022, 15, 399. https://doi.org/10.3390/jrfm15090399
Ernst D, Gleißner W. Paradigm Shift in Finance: The Transformation of the Theory from Perfect to Imperfect Capital Markets Using the Example of Company Valuation. Journal of Risk and Financial Management. 2022; 15(9):399. https://doi.org/10.3390/jrfm15090399
Chicago/Turabian StyleErnst, Dietmar, and Werner Gleißner. 2022. "Paradigm Shift in Finance: The Transformation of the Theory from Perfect to Imperfect Capital Markets Using the Example of Company Valuation" Journal of Risk and Financial Management 15, no. 9: 399. https://doi.org/10.3390/jrfm15090399