On Improving Size and Leverage Adjustment Methods for Equity Volatilities

Although in practice equity volatility remains one of the most significant value drivers for many earnout and derivative valuations, equity allocation analyses, and liquidity discount assessments, awareness regarding appropriate methods and techniques for adjusting volatility is still lacking in the industry. The paucity of available academic literature on the topic is confusing and comes with inappropriate guidance from industry publications. Size and leverage methodologies for adjusting equity volatility—presented in a Business Valuation Review article published in 2024 by Covrig, Travers, and Harms—are examined here. A size-adjustment method developed by this author fifteen years ago is compared with the size-adjustment method of Covrig and colleagues. Leverage adjustments and problems associated with various methodologies suggested in industry publications when adjusting volatility for size are discussed.