Asset valuation in insolvency in the Czech Republic: An empirical investigation

We focus our research on the accuracy of asset valuation made by chartered valuation experts under the law regulating insolvency proceedings in the Czech Republic. The research goal is to investigate how precisely the valuers were able to determine the real market price to be achieved. For this a set of empirical evidence from 2008-2014 provided by the Czech Ministry of Justice was used. Should the estimates not be accurate, than, we would be interested in the reason why those results might differ. After collecting the necessary data of the insolvency proceedings we studied the results of the expert valuation of assets, followed by the prices achieved in the realization of assets in an open market by the insolvency administrator. The research question regarding how accurate these estimates were had a clear answer. Based on our findings we come to the conclusion that for the expert's estimate of the value, respectively the „usual price“, the average discrepancy from the actual prices achieved differed by more than 30 percent in both directions under the circumstances that the estate was converted into cash within bankruptcy under a single contract. This difference is considered to be essential and we evaluate possible explanation of the causes, which include poor choice of basis of value in relation to the actual purpose of valuation, qualitative change in the assets in the period from the moment of valuation until realization, information asymmetry and opportunity costs on the part of the insolvency administrator, behavior and the nature of investors operating in the field of insolvency, quality of expert appraisal and "negative goodwill" of insolvency. The research is the basis of a long term study on valuation in insolvency proceedings in the Czech Republic.