Brealey,Myers, and Allen on Real Options

Real options are valuable sources of flexibility that are either inherent in, or can be built into, corporate assets. The value of such options are generally not captured by the standard discounted cash flow (DCF) approach, but can be estimated using a variant of financial option pricing techniques. This article provides an overview of the basics of real option valuation by examining four important kinds of real options:

• 1 The option to make follow‐on investments. Companies often cite “strategic” value when taking on negative‐NPV projects. A close look at the payoffs from such projects reveals call options on follow‐on projects in addition to the immediate cash flows from the projects. Today's investments can generate tomorrow's opportunities.
• 2 The option to wait (and learn) before investing. This is equivalent to owning a call option on the investment project. The call is exercised when the firm commits to the project. But often it's better to defer a positive‐NPV project in order to keep the call alive. Deferral is most attractive when uncertainty is great and immediate project cash flows—which are lost or postponed by waiting—are small.
• 3 The option to abandon. The option to abandon a project provides partial insurance against failure. This is a put option; the put's exercise price is the value of the project's assets if sold or shifted to a more valuable use.
• 4 The option to vary the firm's output or its production methods. Companies often build flexibility into their production facilities so that they can use the cheapest raw materials or produce the most valuable set of outputs. In this case they effectively acquire the option to exchange one asset for another.

The authors also make the point that, in most applications, real‐option valuation methods are a complement to, not a substitute for, the DCF method. Indeed DCF, which is best suited to and usually sufficient for safe investments and “cash cow” assets, is typically the starting point for real‐option analyses. In such cases, DCF is used to generate the values of the “underlying assets”—that is, the projects when viewed without their options or sources of flexibility.     

Agency Costs, Risk Management, and Capital Structure

The joint determination of capital structure and investment risk is examined. Optimal capital structure reflects both the tax advantages of debt less default costs (Modigliani and Miller (1958, 1963)), and the agency costs resulting from asset substitution (Jensen and Meckling (1976)). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is small for the range of environments considered. Risk management is also examined. Hedging permits greater leverage. Even when a firm cannot precommit to hedging, it will still do so. Surprisingly, hedging benefits often are greater when agency costs are low.     

Valuation,Capital Structure,and Shareholder Unanimity for Depository Financial Intermediaries

The theory of corporate finance is not directly applicable to financial intermediary decision-making. The lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm. First, when intermediaries accept deposit financing, they must produce services such as liquidity and convenience at considerable expense for real resources. Second, the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid. In this paper, a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived.     

Capital Structure, Agency Problems, and Deposit Insurance in Banking Firms

This paper applies and synthesizes various theories of corporate finance, including capital structure, agency insurance, and regulation, to the case of banking firms and the deposite insurance system. It is argued that a value-maximizing bank would reach its optimal capital structure by minimizing the agency costs of incentive conflicts among stockholders, managers, uninsured depositors, and the deposit insurance agency. Although a regulatory imposed capital requirment may reduce the agency costs inherent in the insurance contact, it cannot produce a universal capital structure that is optimal for all insured banks. The observed capital structure patterns also suggest that banks actively seek an optimal capital structure.     

Capital Structure,Corporate Taxation and Firm Age*

This paper analyses the relationship between corporate taxation, firm age and debt. We adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions typically faced by a firm. Our model suggests that the debt ratio is associated positively with the corporate tax rate and negatively with firm age. Further, we predict that the tax-induced advantage of debt is more important for older firms than for younger ones. To test these hypotheses empirically, we use a cross-section of around 405,000 firms from 35 European countries and 127 NACE three-digit industries. In line with previous research, we find that a firm's debt ratio increases with the corporate tax rate. Further, we observe that older firms exhibit smaller debt ratios than their younger counterparts. Finally, consistent with our theoretical model, we find a positive interaction between corporate taxation and firm age, indicating that the impact of corporate taxation on debt increases over a firm's lifetime.     

国外资本结构代理成本理论综述

企业不同的融资方式形成不同的利益格局,不同的利益格局势必导致不同的利益冲突,不同的利益冲突导致了不同的融资方式的代理成本.围绕着融资方式的代理成本的研究形成了蔚为壮观的现代资本结构的代理成本理论.     

我国上市公司的资本结构与代理成本问题分析

本文分析了我国上市公司股东与经理、股东与债权人之间利益冲突的特点 ,提出了代理成本的资本结构解决方案 :扩大债务融资比重 ,控制配股融资比重 ,建立我国企业债券市场体系 ,完善公司治理机制     

Capital Cash Flows,APV and Valuation

This paper examines three different methods of valuing companies and projects: the adjusted present value (APV), capital cash flows (CCF) and weighted average cost of capital (WACC) methods. It develops the appropriate WACC and beta leveraging formulae appropriate for each valuation model, so that given a particular valuation model the correct APV and CCF values can be determined from the WACC value and vice versa. Further it goes on to show when the perpetuity formulae give poor estimates of the value of individual cash flows, even though the overall values are correct. The paper cautions that the APV and CCF models require more information than is currently known, such as the value of the corporate use of debt, and consequently can give misleading results, particularly in sensitivity analyses.     

A Note on the Myers and Read Capital Allocation Formula

Abstract

The Myers and Read capital allocation formula is an important new actuarial result. This paper gives an overview of the Myers and Read result, explains its significance to actuaries, and provides a simple proof. Then it explains the assumption that the allocation formula makes on the underlying families of loss distributions as expected losses by line vary. It shows that this assumption does not hold when insurers grow by writing more risks from a discrete group of insureds—as is typically the case. Finally, it shows that this failure has a material impact on the predicted results in a realistically sized portfolio of property casualty risks which will severely limit the practical application of the Myers and Read allocation formula.     

Market Valuation and Equity Ownership Structure: The Case of Agency Conflict Regimes

This paper provides further evidence on the link between the firm's performance and the distribution of the common shares between insiders, blockholders and institutions. We endogenize the functional form of the market valuecommon equity structure relationship by using a switching regression methodology. This allows us to observe four distinct ownership structure types that constitute different agency conflict regimes. We provide evidence that supports the notion that investors recognize the existence of such regimes and assess market values differently depending on the type of agency regime the firm operates in. We find that firms with low insider stakes and low blockholder stakes and firms with high insider stakes and high blockholder stakes have the highest agency costs of free cash flow. We also find that the effect of the ownership variables on market values differs across regimes and that there are differences in the monitoring effectiveness of institutional holders and blockholders.     

Corporate Capital Structure,Agency Costs,and Ownership Control: The Case of All-Equity Firms

This paper provides evidence that all-equity firms exhibit greater levels of managerial stockholdings, more extensive family relationships among top management, and higher liquidity positions than a matched sample of levered firms. Further, top managers of all-equity firms with family involvement in corporate operations have greater control of corporate voting rights than managers of all-equity firms without family involvement. These findings are consistent with the interpretation that managerial control of voting rights and family relationships among senior managers are important factors in the decision to eliminate leverage.     

资本结构改变下的企业价值评估周期迭代法与调整现值法

当企业的资本结构发生改变时,评估师可能对解决权益法和投资资本法两种方法所得出结果之间的差异感到棘手。本文将详细讨论这一问题。我们可以消除权益法和投资资本法两种评估结果之间的差异。消除的方法,一是采用周期迭代法,或是采用调整现值法。这两种方法都可以使权益法及投资资本法得出同样的评估结果。     

资本市场与资产评估

一、资产评估对我国资本市场持续健康发展的作用 资产评估作为一种专业化中介服务行业,服务于诸多重要经济领域和经济活动．在规范交易行为、降低交易成本、维护经济秩序、保障金融安全、促进经济发展等方面发挥着十分重要的作用。     

Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model

We derive the optimal dynamic contract in a continuous‐time principal‐agent setting, and implement it with a capital structure (credit line, long‐term debt, and equity) over which the agent controls the payout policy. While the project's volatility and liquidation cost have little impact on the firm's total debt capacity, they increase the use of credit versus debt. Leverage is nonstationary, and declines with past profitability. The firm may hold a compensating cash balance while borrowing (at a higher rate) through the credit line. Surprisingly, the usual conflicts between debt and equity (asset substitution, strategic default) need not arise.     

Human Capital,Bankruptcy, and Capital Structure

We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade‐off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.     

Brand Values and Capital Market Valuation

Brand value estimates are significantly positively related to prices and returns, incremental to accounting variables. Questionable brand value estimate reliability underlies lack of financial statement recognition for brands. Findings suggest estimates are relevant and sufficiently reliable to be reflected in share prices. Simultaneous equations estimation reveals inferences are unaffected by potential bias resulting from simultaneity between brand value estimates and equity market value. Brand value estimates are positively associated with advertising expense, operating margin, and market share. Yet, brand value estimates provide significant explanatory power for prices incremental to these variables, and to recognized brand assets and analysts earnings forecasts.     

风险投资中的企业估值问题研究

估值是风险投资中的核心环节。本文综合比较了红利贴现法、股权自由现金流贴现法、经济增加值贴现法、市盈率法、市净率法五种估值方法,探讨了这五种估值方法的优劣和行业适用性。在此基础上,构建了基于产业演进阶段和行业周期性的二维估值方法选择模型。本文还分析了企业家才能、人力资本、核心技术、市场占有、特有资源等企业核心竞争力因素在企业生命周期各阶段中所发挥的作用,提出了在财务估值基础上进行估值水平调整的思路。通过对上述内容的研究,本文为破解投资实践中的估值难题提供一种解决途径。     

Agency Costs,Mispricing, and Ownership Structure

Standard theories of ownership assume insiders ultimately bear all agency costs and therefore act to minimize conflicts of interest. However, overvalued equity can offset these costs and induce listings associated with higher agency costs. We explore this possibility by examining a sample of public listings of Japanese subsidiaries. Subsidiaries in which the parent sells a larger stake and subsidiaries with greater scope for expropriation by the parent firm are more overpriced at listing, and minority shareholders fare poorly after listing as mispricing corrects. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.     

Bank Capital Requirements, Capital Structure and Regulation

This paper studies the impact of capital requirements, deposit insurance and franchise value on a bank’s capital structure. We find that properly regulated banks voluntarily choose to maintain capital in excess of the minimum required. Central to this decision is both firm franchise value and the ability of regulators to place banks in receivership stripping equity holders of firm value. These features of our model help explain both the capital structure of the large mortgage Government Sponsored Enterprises and the recent increase in risk taking through leverage by financial institutions. The insights gained from the model are useful in guiding the discussion of financial regulatory reforms.     

Optimal Contracting,Corporate Finance,and Valuation with Inalienable Human Capital

A risk‐averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm's debt capacity, distorts investment and compensation, and constrains the entrepreneur's risk sharing. This puts dynamic liquidity and state‐contingent risk allocation at the center of corporate financial management. The firm balances mean‐variance investment efficiency and the preservation of financial slack. We show that in general the entrepreneur's net worth is overexposed to idiosyncratic risk and underexposed to systematic risk. These distortions are greater the closer the firm is to exhausting its debt capacity.