The more you read financial history the more you would agree to the above question. How is it that people managed to do much of finance without any of today’s fancy degrees? Much of finance then was bouts of common-sense backed by some intuition which builds from work experience. Much of finance today is reduced to less common sense and more degrees. But what to do? You do not get a job based on common sense alone.
What factors affect the professionals’ choice of valuation method? We frame this as a contest between educational background and professional subgroup (consulting, investment banking, private equity, or asset management). But we also investigate (and controlled) for other respondent characteristics, especially paying attention to the type of investment (project finance, listed firms, unlisted firms, real estate) and the type of transaction (mergers and acquisitions, investment decisions, going public or private). We also look at the purpose of the valuation – whether the respondent is on the buy side, the sell side, or in an advisory role.
We may expect valuers with a more advanced degree to use more sophisticated methods and make fewer conceptual mistakes. But sociology and social psychology also recognise that professions have identifiable cultures, and that individuals are influenced by peers and groups (Asch 1955, Greenwood 1957). Therefore, it is also plausible that cultural norms within professional subgroups affect the approach that members of the group prefer. Robert Shiller was an early proponent of some of these ideas (Shiller 1984).
Our comparison of the influence of education versus professional subgroup was motivated by Harris (1995, 1998), who demonstrated that children’s values and behaviour are influenced more by peers than by upbringing at home. Our hypothesis is that valuation professionals would adopt the ‘valuation culture’ of their professional subgroup, rather than the methods from their educational background. We rest this by examining differences in valuation approaches across professional subgroups, because there is no a priori reason why one profession should use more sophisticated valuation methods than another.
We find that there are distinct differences in several elements of the choice of technique across professions. Furthermore, these differences are not related to sophistication. Education has much less influence on this choice. The purpose of the valuation has little effect on the choice of technique.
This implies that there is a degree of arbitrariness about valuations in practice. They are influenced by where the valuation is carried out. Also, education is relatively unimportant in practice, which suggests that higher-level finance education may have more impact if is carried out in the workplace. This may well also be true for other business and management subjects where many theories and approaches flourish. We may ask what role finance education has beyond a bachelor’s degree. Is it merely a sideshow?
It is really interesting how much one has to unlearn at the finance workplace. The degrees just get you in and after that begins the game of learning how finance really works…