Enterprise Valuation and Credit Risk Evaluation —DCF-Based Credit RiskModel~Application in Project/Corporate Bonds & CLO —The Influencing Factors’Research of Market’s Acceptance on M&A Activities~Empirical Tests on Stock Exchange Cases
Date Issued
2004
Date
2004
Author(s)
Chen, Tsung-Kang
DOI
zh-TW
Abstract
Enterprise Valuation and Credit Risk Evaluation
Research I
DCF-Based Credit Risk Model—Application in Project/Corporate Bonds & CLO
ABSTRACT
There are many research models about enterprise credit risk and can be roughly categorized into structural-form and reduced-form according to their assumptions and focuses. Under these two types of credit risk models, few people use stochastic cash flow model to evaluate enterprise credit risk. It’s because people generally think it difficult to estimate cash flow, and no one had ever developed an applicable model to describe the stochastic characteristics of cash flow. Through our observations of cash flow, however, we discover that the behavior of cash flow exist some stochastic characteristics, including mean-reversion and fluctuating above or under zero. We therefore use the concept of “varying coefficient model” (also called time-varying parameter models) to construct a “Time-dependent stochastic cash flow model”. And then based on this model, we further establish a “Multi-periods DCF-Based Credit Risk Model” to estimate a firm’s value and to evaluate a firm’s credit risk.
By using these two models and the concept of expected payoff ratio used to evaluate risky bonds developed by Jarrow-Turnbull Model (1995), we can now value the project bonds and corporate bonds. Furthermore, we expand the single firm’s “Multi-periods DCF-Based Credit Risk Model” to multi-firms and then construct a “Multi-assets & periods DCF-Based Credit Risk Model”. In this way, we then can valuing the securitized products including CLO(Collateralized Loan Obligation), CDO(Collateralized Debt Obligation) re-pooled from all kinds of collateral debts .
In our research, we select 24 companies as our sample and then make empirical tests of valuation and credit risk by our models. The empirical results show that our models precisely value more than two-third of sample companies and successfully assess credit risks of more than three-fourth of sample companies. These results indicate that our models are preliminarily supported by the empirical evidences.
However, in valuing the securitized products such as the CLO by using the “Multi-assets & periods DCF-Based Credit Risk Model” is limited because the model correctly can only deal with the portfolio that assets are cross-default. To handle with this limitation, the Fourier Transform Method (FTM) can be introduced into our models. Fortunately, it seems very promising that the limitation can be relieved by FTM. It is also the focus of our further study.
Research II
The Influencing Factors’ Research of Market’s Acceptance on M&A Activities—Empirical Tests on Stock Exchange Cases
ABSTRACT
Due to hot merges and acquisitions in the recent years in the world, we are interested in the roles and hidden meanings of market’s reaction toward M&A activities. However, market reaction is primarily influenced by expected synergy and merger premium, which individually represents expected benefit in the future and cost for mergers. For this reason, the relationship between expected synergy and merger premium becomes the focus of our research. But in historical researches, there doesn’t exist an integrated-analytical framework to describe the relationship. In this paper, we set a measure for expected synergy through stock price’s fluctuating. Additionally, we construct a new plane for firm’s value and exchange ratio based on L-G model by consideration of the expected synergy and the time-varying earning performance. Furthermore, we develop a LMA model which can integrate expected synergy and merger premium in the analytical framework. This model overcomes the difficulties that expected synergy is hard to compare with merger premium in the past. Moreover, we also create a new measure “the level of market’s acceptance” (LMA) through the analytical framework.
Therefore, there are two main purposes in our research. First, to examine whether the merger case is reasonable or not. Second, to find out what are the factors which can explain market’s reaction (LMA) and discuss the meanings of these significant factors.
In our research, we select 251 stock-exchange mergers (214 for positive premium, 37 for negative premium) as our sample and make judgments for the merger reasonableness by LMA model and statistical tests. As a result, we make some important conclusions: First, 148 of the 251 proposed mergers produced sufficient combined value to maintain each participant’s quadrant I status at the time of merger announcement. Alternatively, the announcement effects produced wealth losses for one or both firms in 103 of the mergers. In the merger period examined (i.e., announcement to the month following completion), at least 40% do not conform to the rationality assumption of LMA model. Second, acquiring firms of the 148 cases outperform the market since one month prior to announcement. It reveals that there may be information leakage. Third, some ratios of relative wealth status significantly influence the level of market’s acceptance in the same direction during the three periods.
To sum up, the main contributions of this study is that, by constructing LMA model and making expected synergy can be efficiently compared with merger premium. We not only solve the constraint of the original L-G model but also create a new and effective measurement of market‘s reaction toward M&A activities. In addition, we explore the relationship between LMA and relative wealth’s ratio and try to discuss its economic meanings.
Subjects
購併
信用風險
市場接受度
平均反轉
時間相依之現金流量隨機模型
企業評價
Mean-reversion
Time-dependent Stochastic Cash Fl
Type
thesis
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