Magni, Carlo Alberto (2004): An alternative approach to firms’ evaluation: expert systems and fuzzy logic. Published in: International Journal of Information Technology and Decision Making , Vol. 1, No. 5 (March 2006): pp. 195-225.
Download (205Kb) | Preview
Discounted Cash Flow techniques are the generally accepted methods for valuing firms. Such methods do not provide explicit acknowledgment of the value determinants and overlook their interrelations. This paper proposes a different method of firm valuation based on fuzzy logic and expert systems. It does represent a conceptual transposition of Discounted Cash Flow techniques but, unlike the latter, it takes explicit account of quantitative and qualitative variables and their mutual integration. Financial, strategic and business aspects are considered by focusing on twenty-nine value drivers that are combined together via “if-then” rules. The output of the system is a real number in the interval [0,1], which represents the value-creation power of the firm. To corroborate the model a sensitivity analysis is conducted. The system may be used for rating and ranking firms as well as for assessing the impact of managers’ decisions on value creation and as a tool of corporate governance.
|Item Type:||MPRA Paper|
|Original Title:||An alternative approach to firms’ evaluation: expert systems and fuzzy logic|
|Keywords:||Firms’ evaluation, fuzzy logic, expert system, rating, acquisition, sensitivity analysis|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods
C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology; Computer Programs > C88 - Other Computer Software
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C67 - Input-Output Models
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Carlo Alberto Magni|
|Date Deposited:||22. Mar 2008 07:14|
|Last Modified:||13. Feb 2013 10:13|
Abdel-Kader, M. G., Dugdale, D. and Taylor, P. (1998). Investment Decisions in Advanced Manufacturing Technology: A Fuzzy Set Theory Approach, Ashgate Publishing Company. Barney, J. B. (1986). Strategic factor markets: Expectations, luck, and business, Management Science, 32, 1231–.1241. Barney, J. B. (1991). Firm Resources and Sustained Competitive Advantage, Journal of Management, 17, 99– 120. Barney, J. B. (2001). Is the resource-based ‘view’ a useful perspective for strategic management research? Yes, Academy of Management Review, 26(1), 41–57. Black, M. (1937), Vagueness: An Exercise in Logical Analysis, Philosophy of Science, 4, 427–455. Black, F. and Scholes, M. (1973). The pricing of options and corporate liabilities, Journal of Political Economy 81, 637–654. Bojadziev, G. and Bojadziev M. (1997). Fuzzy logic for business, finance, and management, World Scientific Publishing Co. Pte. Ltd. Boutsinas , B. (2002). Accessing Data Mining Rules Through Expert Systems, International Journal of Information Technology & Decision Making, 1(4), 657–672. Brealey, R. A. and Myers, S. C. (2000). Principles of Corporate Finance, Irwin McGraw-Hill. Bromiley, P. (2005). The Behavioral Foundations of Strategic Management. Oxford: UK Buckley J. J., Eslami, E. and Feuring, T. (2002). Fuzzy Mathematics in Economics and Engineering. Heidelberg: Physica-Verlag. Chen, M., Tzeng, G. and Tang, T. (2005). Fuzzy MCDM Approach for Evaluation of Expatriate Assignments, International Journal of Information Technology & Decision Making, 4(2), 277–296. Chen, Y., Motiwalla, L. and Khan, M. R. (2004), Using Super-efficiency DEA to Evaluate Financial Performance of E-Business Initiative in the Retail Industry, International Journal of Information Technology & Decision Making, 3(2), 337–352. Collis, D. and Montgomery, C. (1995). Competing on Resources: Strategy in the 1990’s, Harvard Business Review, 73, 119–128, July-August. Copeland, T. E. and Antikarov, V. (2001). Real Options: a practitioner’s guide, New York: Texere. Copeland, T. E. and Weston, J. F. (1988). Financial Theory and Corporate Policy, New York: John Wiley & Sons, third edition. Craiger, J. P., Coovert, M. D. and Teachout, M. S. (2003). Predicting Job Performance with a Fuzzy Rule- Based System, International Journal of Information Technology & Decision Making, 2(3), 425–444. Damodaran, A. (1994). Damodaran on Valuation, New York: John Wiley & Sons. Damodaran, A. (1999). Applied Corporate Finance: A User’s Manual, New York: John Wiley & Sons. Damodaran, A. (2001). The Dark Side of Valuation,Upper Saddle River, NJ: Prentice Hall. Dixit, A. and Pindyck, R. (1994). Investment under Uncertainty, Princeton NJ: Princeton University Press. Facchinetti, G. and Mastroleo, G. (2001). A fuzzy system for the evaluation of insurance fraud, Proceedings of IV Meeting Italo-Spagnolo di Matematica Finanziaria ed Attuariale, 293–302 Alghero, June 28–30. Facchinetti, G., Mastroleo, G. and Paba, S. (2000). A fuzzy approach to the geography of industrial districts, Proceedings of the 2000 ACM Symposium on Applied Computing, 514–518, Como, March 19–21. Facchinetti, G., Cosma, S., Mastroleo, G. and Ferretti, R. (2001). A fuzzy credit rating approach for small firm bank creditworthiness. An Italian case, Proceedings of CIMA 2001, International ICSC-NAISO Congress on Computational Intelligence: Methods & Applications, Bangor, Wales, UK, June 19–22. Fernández, P. (2002). Valuation Methods and Shareholder Value Creation, San Diego: Academic Press. Gilovich, T., Griffin, D. and Kahneman, D. (Eds.) (2002). Heuristic and Biases. The Psychology of Intuitive Judgment, Cambridge, UK: Cambridge University Press. Gigerenzer, G. and Selten, R. (Eds.) (2001). Bounded Rationality. The Adaptive Toolbox, The MIT Press: Cambridge, Massachussets, USA. Gigerenzer, G., Todd, P. M. and the ABC Research Group (1999). Simple Heuristics That Make Us Smart, New York: Oxford University Press. Grant, R. (1991). The Resource-based Theory of Competitive Advantage: Implications for Strategy Formulation, California Management Review, 33(3), 114–135. Grant, R. and Robert M. (1995). Contemporary strategy analysis: concepts, techniques, applications, Oxford: Blackwell. Isenberg, D. (1984). How senior managers think, Harvard Business Review, 62(6), 81–91. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers, American Economic Review, 76(2), 323–329. Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics, 3(4), 305–360, Winter. Kosko, B. (1986). Fuzzy Cognitive Maps, International Journal of Man-Machine Studies, 24, 65–75, January. Kosko, B. (1990). Fuzziness vs. Probability, International Journal of General Systems, 17, 211–240. Kosko, B. (1993). Fuzzy Thinking: The New Science of Fuzzy Logic, Hyperion. Lander, D. M. and Pinches, G. E. (1998). Challenges to the Practical Implementation of Modelling and Valuing Real Options, The Quarterly Review of Economics and Finance, 38, Special Issue, 537–567. Levinthal, D. A. (1995). Strategic management and the exploration of diversity. In C. A. Montgomery (Ed.). Resource-Based and Evolutionary Theories of the Firm, pp. 19–42, Boston, MA: Kluwer. Liu, J., Nissim, D. and Thomas, J. (2002). Equity Valuation Using Multiples, Journal of Accounting Research, 40, 135–173. Magni, C. A. (1998). Aspetti quantitativi e qualitativi nella valutazione di un'opzione di investimento, Finanza, marketing e produzione, 3, 123–149. Magni, C. A. (2002). Investment Decisions in the Theory of Finance: Some Antinomies and Inconsistencies. European Journal of Operational Research, 137(1), 206–217. Magni, C. A., Mastroleo, G., and Facchinetti, G. (2002). A Fuzzy Expert System for Solving Real Option Decision Processes, Fuzzy Economic Review, 6(2), 51–73. Magni, C. A., Mastroleo, G., Vignola, M. and Facchinetti, G. (2004). Strategic options and expert systems: a fruitful marriage, Soft Computing, 8(3), 179–192, January. Malagoli, S., Magni, C. A. and Mastroleo, G. (2004). An alternative approach to firms’ evaluation: expert systems and fuzzy logic. Quaderni del Dipartimento di Economia Aziendale, Università di Modena e Reggio Emilia. McNeil, D. and Freiberger, D. (1994). Fuzzy Logic, New York: Touchstone-Simon and Schuster. Miles, J. A. and Ezzel, J. R. (1980). The Weighted Average Cost of Capital, Perfect Capital Markets and Project Life: A Clarification. Journal of Financial and Quantitative Analysis, 15, 719–730. Miles, J. A. and Ezzel, J. R. (1985). Reformuling Tax Shield Valuation: A Note, Journal of Finance, 40, 1485–1492. Myers, S. C. (1974). Interactions of Corporate Financing and Investment Decisions–Implications for Capital Budgeting. Journal of Finance, 29, 1–25. Porter, M. E. (1980). Competitive Strategy, New York: The Free Press. Porter, M. E. (1985). Competitive Advantage, New York: The Free Press. Ruback, R. S. (2002). Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows, Financial Management, 31(2), 85–103, Summer. Simon, H. A. (1955). A behavioral model of rational choice, Quarterly Journal of Economics, 69, 99–118. Simon, H. A. (1956). Rational choice and the structure of environment, Psychological Review, 63, 129–138. Simons, T., Pelled, L. H. and Smith, K. A. (1999). Making use of difference: Diversity, debate, and decision comprehensiveness in Top Management Teams, Academy of Management Journal, 42(6), 662–673. Sloan, R. G. (1996). Using earnings and free cash flow to evaluate corporate performance, Journal of Applied Corporate Finance, 9(1), 70–78, Spring. Sloman, S. A. (1996). The empirical case for two systems of reasoning, Psychological Bulletin, 119, 3–22. Sloman, S. A. (2002). Two Systems of Reasoning, In Heuristic and Biases. The Psychology of Intuitive Judgment, See Gilovich, Griffin and Kahneman (2002). Sorensen, E. H. and Wiliamson, D. A. (1985), Some evidence on the value of the dividend discount model, Financial Analysts Journal, 41, 60–69. Sugeno, M. (Ed.) (1985). Industrial Application of Fuzzy Control, New York: North-Holland. Stewart, G. B. (1991). The Quest for Value: The EVA Management Guide, New York: HarperCollins Publishers. Tanaka, K. (1997). An Introduction to Fuzzy Logic for Practical Applications, New York: Springer-Verlag. Trigeorgis, L. (1996) Real Options: Managerial Flexibiliy and Strategy in Resource Allocation, Cambridge, MA, MIT Press. Von Altrock C. (1997). Fuzzy Logic and Neurofuzzy Applications in Business and Finance, Prentice-Hall. Wang, M., Wang, H. and Lin, C. (2005). Ranking Fuzzy Number Based On Lexicographic Screening Procedure, International Journal of Information Technology & Decision Making, 4(4) , 663–678. Zadeh, L. A. (1965). Fuzzy Sets, Information and Control, 8, 338–353. Zadeh, L. A. (1968). Probability measure of fuzzy events, Journal of Mathematical Analysis and Applications, 23(2), 421–427, August. Zebda, A. (1989). Fuzzy Set Theory and Accounting, Journal of Accounting Literature, 8, 76–105. Zebda, A. (1991). The Problem of Ambiguity and Vagueness in Accounting, Behavioural Research in Accounting, 3, 117–145. Zimmermann H. J. (1996). Fuzzy Set Theory and its Applications, third Edition, Boston, MA: Kluwer Academic Publishers. Zimmermann H. J. (1997). Operators in Models of Decision Making, In D.Dubois, H.Prade, R.R.Yager (eds.), Fuzzy Information Engineering: a guided tour of application, New York: John Wiley & Sons. Zimmermann, H. J. and Zysno P. (1980). Latent Connectives in Human Decision Making, Fuzzy Sets and Systems, 4, 37–51.