Valuation of human assets in a securities brokerage firm: An empirical study

When a service firm is acquired by another firm there is often a significant premium paid over the acquired firm's book value. Often a substantial portion of this premium is due to the value of the human assets acquired. This paper presents a methodology by which the value of the human assets may be determined separate and distinct from goodwill. This is then applied to a case study in a securities brokerage firm. Finally, an amortization schedule is set forth so the asset can be amortized for tax purposes.     

Corporate asset purchases and sales: Theory and evidence

Purchases and sales of operating assets by firms generated $162 billion for shareholders over the past 20 years. This contrasts sharply with the evidence on mergers. This paper characterizes the behavior of value-maximizing firms, which could grow organically, purchase existing assets, or sell assets. The approach yields an endogenous selection model that links asset purchases and sales to fundamental properties of the firm. Empirical tests confirm the predictions of the model. In particular, return on assets and size strongly predict when firms purchase or sell assets, and the transaction size covaries with the value of capital employed by the firm. These findings indicate that corporate asset purchases and sales are consistent with efficient investment decisions.     

Switching to a poor business activity: optimal capital structure, agency costs and covenant rules

We address the issue of modeling and quantifying the asset substitution problem in a setting where equityholders decisions alter both the volatility and the return of the firm cash flows. Our results contrast with those obtained in models where the agency problem is reduced to a pure risk-shifting problem. We find larger agency costs and lower optimal leverages. We identify the bankruptcy trigger written in debt indenture, which maximizes ex-ante firm value, given that equityholders will ex-post be able to risk-shift. Our model highlights the tradeoff between ex-post inefficient behavior of equityholders and inefficient covenant restrictions.      

Cash holdings and real asset liquidity

This paper examines the relationship between the ability of a firm to sell its real assets and its cash holdings behavior. A substitution effect exists between the size of cash balances and the liquidity of a firm’s real assets when access to external capital markets is limited. Among financially constrained firms, higher asset liquidity is related to lower cash holdings. Additionally for financially constrained firms, the market value of cash is lower for firms with higher asset liquidity.     

Liquidation Values and Debt Capacity: A Market Equilibrium Approach

We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. When a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such illiquidity makes assets cheap in bad times, and so ex ante is a significant private cost of leverage. We use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s.     

金融资产配置与违约风险:蓄水池效应,还是逐利效应？

本文以2007—2016年中国A股上市公司为研究对象,检验了企业金融资产配置对违约风险的影响。实证研究发现:金融资产持有量越多,企业的违约风险越低,金融资产配置的“蓄水池效应”显著;在货币政策宽松时期,金融资产配置导致的代理冲突显现,宽松的货币政策会抑制金融资产投资对违约风险的降低作用。政府规制也会有一定的公司治理作用,将产业政策纳入讨论发现:对于产业政策支持的行业来说,企业金融资产配置能够降低违约风险,但是宽松的货币政策会刺激管理层的短视投资行为,抑制政府规制的公司治理作用。进一步地,本文提出会计稳健性的提升是企业金融资产配置降低违约风险的重要路径。本文的研究结论丰富了企业金融资产配置动机和违约风险影响因素的讨论,能够为政府部门防范经济运行中的内在风险提供有益借鉴。     

The impact of conglomeration on the option value of equity

Using contingent claims analysis, I quantify the effect of risk-reducing corporate diversification on the value of equity as a call option on firm assets. The impact of conglomeration on firm risk is heavily conditioned on firm size. In contrast to small firms, the risk of large firms does not decline with increasing conglomeration. Accounting for this effect, the expected equity discount is much lower than commonly assumed and can even turn into a premium if the path dependency of equity is incorporated. My results stand in direct contrast to those of Mansi and Reeb (2002) and caution against using asset substitution as a qualitative argument for explaining economy-wide value phenomena.     

Corporate Risk Management and the Incentive Effects of Debt

This paper demonstrates how the incentive of manager-equityholders to substitute toward riskier assets, commonly referred to as the “asset substitution problem,” is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager-equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager-equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level.     

自由现金流量创造力与违约风险——来自A股公司的经验证据

本文基于我国A股上市公司数据,研究了企业自由现金流量创造力与违约风险之间的关系。研究发现：(1)企业自由现金流量创造力越强,其违约风险越低。经过一系列稳健性检验后,该结论依旧成立。(2)自由现金流量创造力越强的企业往往有更低的债务规模、更高的资产收益率和更低的股票波动,因而其违约风险更低。(3)自由现金流量创造力与违约风险的负相关关系,主要存在于货币政策紧缩时期以及外部信息环境较差的企业。本文发现意味着,监管部门和投资者应重视上市公司自由现金流量创造力不足所带来的潜在债务违约风险,通过不断提高公司自由现金流量创造力,助力我国宏观经济与微观企业高质量发展。     

Capital Structure and Assets: Effects of an Implicit Collateral

This paper analyses a firm's capital structure choice when assets have outside value. Valuable assets implicitly provide a collateral and increase tax shield exploitation. The key feature in this paper is asset value uncertainty, implying that it is unknown ex ante whether the equity holders ex post optimally sell the assets or re‐optimise the capital structure. Ex ante, more uncertain asset value decreases leverage, but not firm value, and selling the assets becomes less likely. Firms should tend to invest in assets whose value is less correlated to changes in earnings and, in addition, asset sales are less likely when this correlation is low.     

Decision usefulness of whole-asset operating lease capitalizations

Monson (2001) and Hepp and Scoles (2012) argue that some leased assets should be capitalized at the assets' purchase price (whole-asset value) rather than at the present value of future minimum lease payments (right-of-use asset value). The argument is based in part on the notion that the assets under lease generate future income not the obligation related to future lease payments. To test the notion we compare associations between capitalizations representing whole asset values and current and future return on assets (ROA) and return on equity (ROE) with capitalizations representing right-of-use asset values and current and future ROA and ROE. Our results indicate that the whole-asset annuity values are incrementally associated with future ROA and ROE over right-of-use asset values. We interpret our results to suggest that the current practice of capitalizing future lease payments does not fully reflect the income generation provided by leased assets.     

Book‐to‐Market Equity,Asset Correlations and the Basel Capital Requirement

This paper examines the effect of book‐to‐market equity (BE/ME) on asset correlations under the Basel capital requirement. We find that BE/ME captures variations in asset correlations after controlling for firm size, default probability and industry effects from 1987 to 2011. Obligors with higher BE/ME exhibit lower asset correlations compared to those with lower BE/ME. Decomposing BE/ME into assets‐in‐place and growth options based on the asset pricing literature shows that obligors with more assets‐in‐place or more fixed assets have higher BE/ME and lower asset correlations than those with more growth options. Overall, our findings suggest that BE/ME is an additional important factor that may improve the estimates of asset correlations and thereby banks’ capital adequacy.     

Longitudinal value relevance of earnings and intangible assets: Evidence from Australian firms

Recent U.S. studies report that earnings value relevance has declined over time. Some authors suggest non-recognition of intangible assets in the U.S. is a major reason for declining earnings value relevance. However, the evidence is mixed on the effect of non-recognition of intangible assets. To examine this conjecture, this paper examines earnings value relevance for Australian firms since Australian GAAP has not prohibited intangible asset recognition. Using a variety of established models and specifications, our results indicate that for the average firm, there is weak evidence of decline in earnings value relevance. However, firms that capitalize intangibles have increasing earnings value relevance. Further, the magnitude of the difference in earnings value relevance between capitalizing firms and non-capitalizing firms is most pronounced in the latter part of the 1990s and this difference is increasing.     

The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets

A series of experiments illustrate that relaxing short‐selling constraints lowers prices in experimental asset markets, but does not induce prices to track fundamentals. We argue that prices in experimental asset markets are influenced by restrictions on short‐selling capacity and limits on the cash available for purchases. Restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner. A simulation model, based on DeLong et al. (1990) , generates average price patterns that are similar to the observed data.     

Optimality of project financing: Theory and empirical implications in finance and accounting

During the 1980s a fairly active market developed in the private placement of limited recourse project financing. Although this form of financing is gaining in importance, we know very little about it. This article presents a theoretical analysis of project financing. In the model of the firm presented, outstanding risky debt gives rise to agency costs of underinvestment that are offset by the benefit of debt-related tax shields. The tradeoff specifies the optimal leverage for a firm. Within this framework, we consider the optimality of financing a new project with a nonrecourse project financing arrangement. We derive implications for 1) the characteristics of a new venture that will be project financed, 2) the wealth gains from project financing over that of financing with straight debt, and 3) the optimal allocation of debt across the different assets (the sponsor firm vs. the new venture). It is shown that a project financing arrangement, where the debt is optimally allocated to the sponsor firm and the new venture, increases value by reducing agency costs and increasing the value of tax shields (compared to the case of straight debt financing). The optimal allocation of debt in project financing involves assigning to the sponsor firm and the new venture debt levels equal to their individual optimal capital structures. Several testable empirical implications in finance and accounting are developed.     

The effect of changes in ownership structure on performance: Evidence from the thrift industry

Restrictions on stock ownership may harm a company's performance, because restrictions prevent owners from choosing an optimal structure. We examine the stock-price performance and ownership structure of a sample of thrift institutions that converted from mutual to stock ownership. We find that after conversion and the expiration of ownership-structure restrictions, firm performance improves significantly, and the portions of the firm owned by managers and the firm's employee stock ownership plan increase. Changes in performance are positively associated with changes in ownership by managers, but negatively associated with changes in ownership by employee stock ownership plans.     

Asset financing with credit risk

This paper develops a model for the unified valuation of all forms of real asset financing, such as bank loans, leases, securitization vehicles, and credit guarantees, secured by assets that generate a stochastic service flow to the operator, or a rental stream to the lessor, and depreciate over a finite economic life to their scrap value. Examples include mobile equipment, such as aircraft, railroad equipment, ships, trucks and trailers, as well as energy generation assets, heavy factory equipment and construction equipment. In the event of obligor default, after a repossession delay and incurring costs of repossession, maintenance, re-marketing and re-deployment, the lender repossesses the asset and sells it on the secondary market and is, thus, subject to the risk of decline in the market value of the asset. The model we develop in this paper treats all forms of asset financing in a unified fashion as contingent claims on the collateral asset and the credit of the borrower. As an application, we estimate the collateral asset model on historical secondary market data for aircraft values and calibrate the financing model to the Enhanced Equipment Trust Certificates (EETCs) issued in 2007 by Continental Airlines and secured by a fleet of new aircraft. We then apply the calibrated model to value private market financing, including bank loans, leases, and credit guarantees, consistently with the capital market financing, and assess the impact of repossession delays on credit spreads. This analysis leads to a policy insight suggesting that bankruptcy laws limiting asset repossession delays lead to lower costs of asset financing.     

The collateral channel: Evidence on leverage and asset tangibility

We examine how asset structure is related to leverage in different institutional environments, using tens of thousands of firm-level observations from small, privately held, emerging market firms that are likely to face financing constraints. Our empirical analysis indicates that the linkage between asset tangibility (fixed assets as a portion of total assets) and leverage (measured as long-term debt over total assets) varies, such that in countries with fewer restrictions on collateral (land transferability), the relationship between these variables is much tighter. This also applies to the linkage between tangibility and debt maturity structure (measured as long-term debt over total debt). We find no evidence that industry concentration in different countries or changing composition of firms over time is driving our findings. The results are robust to using firm-level fixed effects specifications, to clustering error terms at the country level, and to using an alternative proxy for collateral law regime.     

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Modigliani and Miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage‐free. We investigate this invariance theorem in experimental asset markets, finding value‐invariance for assets of identical risks when returns are perfectly correlated. However, exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated, in which case the law of one price is violated. Discrepancies shrink in consecutive markets, but persist even with experienced traders. In markets where overall trader acuity is high, assets trade closer to parity.     

A Note on the Analytics and Geometry of Limiting Mean—Variance Investment Opportunity Sets

This paper extends the mathematics developed by Merton (1972) to the limiting investment opportunity set as smaller risk assets are added. Investment opportunity sets of risky assets are well-known to be described by hyperbolae in mean-standard deviation space. In practice, the asset classes in portfolios may vary from high risk common stocks to near cash assets. Low variability assets change the appearance of the investment opportunity set to the extent that a unique optimum risky asset portfolio disappears. The limiting result is similar to the investment opportunity set that arises when two assets are perfectly correlated. The location of the IOS is shown to mathematically depend upon the level of the riskless interest rate and one slope parameter. The slope parameter is estimable, using a finite number of assets, and represents a bound on market Sharpe ratios.