Valuation of innovative companies

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Recent years have seen unprecedented fluctuations in international stock markets, highlighting the inadequacy of traditional valuation methods for innovative companies. This thesis focuses on developing a new valuation model that addresses the specific risk factors associated with such companies and empirically applies it. After reviewing various valuation approaches, the model is detailed, featuring stochastic definitions of key value drivers that yield a stochastic distribution of periodic free cash flows as inputs for calculating present company value. It incorporates industry-specific parameters based on Porter’s five competitive forces, while also separately considering the expected frequency of bankruptcy. The empirical analysis evaluates twenty-one innovative companies across three different sectors. The results reveal option-like characteristics in these companies, illustrated by asymmetric probability distributions that define their values. Ultimately, the findings suggest that this new approach effectively addresses the asymmetric risk profile of innovative companies, making it a valuable tool for valuing all companies.