market value

Definition of market value

Noun

market value (plural market values)

1. (finance) The price which a seller might reasonably expect to fetch for goods, services or securities on the open market.

Further reading

Market value is the price at which an asset would trade in a competitive Walrasian auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some circumstances.

Definition

International Valuation Standards defines market value as "the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion."

Market value is a concept distinct from market price, which is "the price at which one can transact", while market value is "the true underlying value" according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations must prevail. Market value is also distinct from fair value in that fair value depends on the parties involved, while market value does not. For example, IVS currently notes fair value "requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. Although market value may meet these criteria, this is not necessarily always the case. Fair value is frequently used when undertaking due diligence in corporate transactions, where particular synergies between the two parties may mean that the price that is fair between them is higher than the price that might be obtainable in the wider market. In other words "special value" may be generated. market value requires this element of "special value" to be disregarded, but it forms part of the assessment of fair value.

Legal Interpretation

The case of Luxmoore-May and Another v. Messenger May Baverstock [1990] 1 W.L.R. 1009 shows us the legal interpretation of market value: "The measure of damage in this case is, I conclude, the difference between what the foxhounds in fact realised consequent on the defendants' breach of contract and what was their true open market value at that time. What better guide could there be to that value than the price at which these paintings happened to be knocked down at Sotheby's so shortly afterwards? The price which the international art market was willing to pay was surely prima facie the best evidence of the foxhounds' value."