Valuation of bankrupt firms

This study compares the market value of firms that reorganizein bankruptcy with estimates of value based on management'spublished cash flow projections. We estimate firm values usingmodels that have been shown in other contexts to generate relativelyprecise estimates of value. We find that these methods generallyyield unbiased estimates of value, but the dispersion of valuationerrors is very wide - the sample ratio of estimated value tomarket value varies from less than 20% to greater than 250%.Cross-sectional analysis indicates that the variation in theseerrors is related to empirical proxies for claimholders' incentivesto overstate or understate the firm's value.     

Life in the pits: competitive market making and inventory control

We use futures transaction data to investigate cross-sectionalrelationships between market-maker inventory positions and tradeactivity. The investigating documents strongly that traderscontrol inventory throughout the trading day. Despite this evidenceof inventory management, typical inventory control models predictthat market-maker reservation prices are negatively influencedby inventory. Surprisingly, our evidence shows, as a strongand consistent empirical regularity, that correlations betweeninventory and reservation prices are positive. We interpretthe evidence as consistent with active position takeing by futuresmarket floor traders.     

Testing for deliberate underpricing in the IPO premarket: a stochastic frontier approach

We reevaluate the IPO underpricing phenomenon using the stochasticfrontier methodology. The advantage of the stochastic frontieris that it can be used to measure the level of deliberate underpricingin the premarket without using after-market information. Thisis accomplished through the estimation of a systematic one-sidederror term that measures 'inefficiency' or the difference betweenthe maximum predicted offer price and the actual offer price.Data for the analysis are comprised of 1,035 IPOs of commonstock issued by firm commitment between 1975 and 1984. IPOsappear to be deliberately underpriced in the premarket in bothhot-market and nonhot-market periods. Moreover, the determinantsof the maximum IPO price have different effects in the two timeperiods.     

Reputation and its risks

Regulators, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to natural disasters. Yet they have all but ignored reputational risk, mostly because they aren't sure how to define or measure it. That's a big problem, say the authors. Because so much market value comes from hard-to-assess intangible assets like brand equity and intellectual capital, organizations are especially vulnerable to anything that damages their reputations. Moreover, companies with strong positive reputations attract better talent and are perceived as providing more value in their products and services, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services. Since the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values and lower costs of capital. Most companies, however, do an inadequate job of managing their reputations in general and the risks to their reputations in particular. They tend to focus their energies on handling the threats to their reputations that have already surfaced. That is not risk management; it is crisis management--a reactive approach aimed at limiting the damage.The authors provide a framework for actively managing reputational risk. They introduce three factors (the reputation-reality gap, changing beliefs and expectations, and weak internal coordination) that affect the level of such risks and then explore several ways to sufficiently quantify and control those factors. The process outlined in this article will help managers do a better job of assessing existing and potential threats to their companies' reputations and deciding whether to accept a particular risk or take actions to avoid or mitigate it.