Book Value Of Assets Research Articles

The Empirical Relationship between Average Asset Correlation, Firm Probability of Default and Asset Size

The asymptotic single risk factor (ASRF) approach is a simplified framework for determining regulatory capital charges for credit risk and has become an integral part of how credit risk capital requirements are to be determined under the second Basel Accord. Within this approach, a key regulatory parameter is the average asset correlation. In this paper, we examine the empirical relationship between the average asset correlation, firm probability of default and firm asset size measured by the book value of assets by imposing the ASRF approach within the KMV methodology for determining credit risk capital requirements. Using data from year-end 2000, credit portfolios consisting of U.S., Japanese and European firms are analyzed. The empirical results suggest that average asset correlation is a decreasing function of probability of default and an increasing function of asset size. When compared with the average asset correlations proposed by the Basel Committee on Banking Supervision in November 2001, the empirical average asset correlations further suggest that accounting for firm asset size, especially for larger firms, may be important. In conclusion, the empirical results suggest that a variety of factors may impact average asset correlations within an ASRF framework, and these factors may need to be accounted for in the final calculation of regulatory capital requirements for credit risk.

Multiples Used to Estimate Corporate Value

We evaluated various multiples practitioners use to estimate company value. We found, first, that the asset multiple (market value to book value of assets) generally generates more precise and less biased estimates than do the sales and the earnings multiples. Second, although adjusting for companies' cash levels does not improve estimates of company value, using forecasted earnings rather than trailing earnings does. Third, the earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple generally yields better estimates than does the EBIT multiple. Finally, the accuracy and bias of value estimates, as well as the relative performance of the multiples, vary greatly by company size, company profitability, and the extent of intangible value in the company.

Valuation of Investment Companies in Chile

Though no clear definition of investment companies exists in Chile, it has been generally understood to refer to companies that have investments in other companies (with or without corporate control) but that do not own productive assets. A question that naturally arises is whether the market value of investment companies is equal to the economic value of the assets in which they invest, and if not, what factors account for the difference. International evidence indicates that for conglomerates a discount on market value would exist and also the situation would be similar (although not identical) to closed-end funds. In this paper we study the existence and explanation of a discount to Chilean investment companies. We find an average discount of 28% in a sample of 22 investment companies studied in the period December 1993 - December 1999; and the structure of premiums and discounts is explained in an 83% by four variables. The results reported in this study are consistent with the following hypotheses: The discount of the investment companies is positively related to the percentage of insider ownership (insiders can maximise its wealth to the detriment of outsiders). On the other hand, it is negatively related to: the investment in filiated and related companies, the amount invested in investment companies maintained in the portfolio (probably due to an agency problem among shareholders), and the Depurate Book Value of Assets (a regulatory accounting restriction that affects Chilean pension fund investments).

Set Kesempatan Investasi : Konstruksi dan Analisis Hubungannya dengan Kebijakan Pendanaan dan Dividen

The primary objective of this research is examining correlation of three kinds of IOS proxies with realized growth after period of measuring the IOS level (t+l until t+5). The three kinds of IOS proxies are single empirical rasio (market to book value of asset or MVABVA , market to book value of equity or MVEBVE, price to earning per-price or PER, capital expenditure to book value of asset or CAPBVA and capital expenditure to market value of asset or CAPMVA), instrumental variable (VIIOS) and factor score (Skor). The results of one tailed Spearman Rank Correlation analysis show that all of IOS proxies positively correlated with realized growth of sales t+l, book value of equity t+l and book value of asset t+1. The common indeks of IOS, VIIOS and Skor, in the average have higher correlation coeffisients than single ratio IOS level of a company has to be evaluated every one year, because realized growth t+2 and so on have not been able to be predicted yet exactly using all of alternates IOS proxies. All of alternates IOS proxies from the primary hypothesis are used to examine the explanatory power of IOS in financing and dividend policy model. The results show that the growth firms have lower financing (measured by ln market debt to equity) and dividend (measured by ln dividend yields) policy than non growth firms. Contracting cost hypothesis explains the empirical relationship between IOS level, financing and dividend policy. The size of growth companies measured by lg asset higher than non growth companies. Contracting cost and secured debt hypothesis explain that, large companies have higher debt financing policy (measured by ln market debt to equity) than little companies. My opinion is there is conversely explanation between contracting cost hypothesis about association between IOS and debt financing policy, contracting cost and secured debt hypothesis about association between size of companies and debt financing policy and the consistent phenomenon that the growth companies are the large companies. But the result about dividend policy is consistent with contracting cost and pecking order hypothesis that the growth (large) companies have lower dividend policy (measured by ln dividend yields) than non growth (little) companies.

The empirical relationship between average asset correlation, firm probability of default and asset size

The asymptotic single risk factor (ASRF) approach is a simplified framework for determining regulatory capital charges for credit risk and has become an integral part of how credit risk capital requirements are to be determined under the second Basel Accord. Within this approach, a key regulatory parameter is the average asset correlation. In this paper, we examine the empirical relationship between the average asset correlation, firm probability of default and firm asset size measured by the book value of assets by imposing the ASRF approach within the KMV methodology for determining credit risk capital requirements. Using data from year-end 2000, credit portfolios consisting of U.S., Japanese and European firms are analyzed. The empirical results suggest that average asset correlation is a decreasing function of probability of default and an increasing function of asset size. When compared with the average asset correlations proposed by the Basel Committee on Banking Supervision in November 2001, the empirical average asset correlations further suggest that accounting for firm asset size, especially for larger firms, may be important. In conclusion, the empirical results suggest that a variety of factors may impact average asset correlations within an ASRF framework, and these factors may need to be accounted for in the final calculation of regulatory capital requirements for credit risk.

Insider Holding Requirements, Stock Options, and Stock Appreciation Rights

This study examines how a Securities and Exchange Commission rule change affected the design of executive compensation contracts. It shows that a change in insider holding requirements for employee stock options led to a widespread decrease in the use of stock appreciation rights. Further, we find firms that decrease their use of stock appreciation rights compensate employees by increasing their use of employee stock options. The Securities and Exchange Commission rule change provides a unique opportunity to examine the use of compensation methods as it caused firms to examine their policies and make an active decision to modify their practices. Cross-sectionally, we find the likelihood a firm decreases its use of stock appreciation rights positively associated with the magnitude of expense associated with stock appreciation rights, the firm's use of income-increasing accounting methods, leverage, and the ratio of market to book value of assets. We also find a significant interaction effect for the magnitude of expense when interacted with profitability.

An Empirical Study of Derivatives use in the REIT Industry

We examine the use of derivatives in the real estate investment trust (REIT) industry. Tax considerations and speculative motives should not be important factors here, as REITs pay no corporate income tax and their speculative activities are limited by regulations. We find that 41 % of REITs use interest‐rate derivatives, although the amount of derivatives on average is not high. Our principal results are that larger REITs and mortgage REITs are more likely to use derivatives. However, in terms of the amount of derivatives, REITs that are smaller and have a larger amount of debt tend to use more derivatives. We interpret the results as evidence supportive of substantial entry costs for hedging and financial‐distress costs being a major consideration for the level of hedging. REITs with greater ratio of market to book value of assets also tend to use more derivatives. However, this result is not robust across different sample sets. We therefore view this as weak evidence supporting the agency‐cost explanation for hedging. Additional analysis on interest‐rate risk and hedging activities finds that mortgage REITs tend to increase their hedging activities when interest rates decrease, while the opposite is true for equity REITs. We interpret this as evidence consistent with prepayment risk being a major factor for mortgage REITs, while equity REITs primarily hedge to control funding costs.

Government share ownership, investment opportunity set and corporate policy choices in China

This study, using pooled cross-sectional observations of companies listed on the Shanghai Stock Exchange from 1990 to 1995, examines the relationship between government ownership of shares, growth opportunities measured in terms of the investment opportunity set (IOS) and corporate policy decisions. IOS is measured in terms of three ratios; market value of the firm to book value of assets, market value of equity to book value of equity and the earnings price ratio. Corporate policy choices are defined in terms of leverage and dividend policies. Government ownership is found to be positively associated with debt financing and dividend policy. Consistent with prior studies, IOS is found to be negatively associated with debt financing and dividend payments.

Competing Micro Economic Theories Of Industrial Profits: An Empirical Approach

Contrary to the impression given by most textbooks, microeconomics is not a homogeneous discipline. At least two major alternative theories exist which account for the long-run behavior of industrial prices and the between economic sectors in ways which are distinct from standard neoclassical explanations. Both Post Reynesian and Classical (Marxian/NeoRicardian) approaches to economics have developed a growing literature on microfoundations in recent years (see, e.g. Eichner, 1985; Dumenil & Levy, 1985). The coexistence of three apparently incompatible theories is an anomaly for any scientific discipline. In the case of microeconomics this might be explained, in part, by an absence of an orthcdox literature which submits their econonic theory to ocwparisons with alternative approaches, thus lending credence to such alternatives (Eichner, 1985, p. 178). Moreover, orthodox theory has been remiss in applying the correspondence test, i.e., the generation of elgirically testable hypotheses, to its own predictions. It has been argued that neoclaccical economics has been more concerned with comprehensiveness and osherence than with realism (see, e.g., the arguments in Dumenil & Levy, 1986). Post-Keynesian and The New Classical microeconomics, since they are relatively new disciplines, have also largely focused on theoretical development at the expense of empirical testing. Another reason for the lack of efforts such as this one in the past may have been the lack of reliable data. Recent efforts by the Eureau of Economic Analysis have now produced consistent industry-level data on an establishment basis, including profit variables and assets at replacement-cost valuations. Earlier empirical studies were forced to construct rough industry aggregates from small firm samples and to use book values of assets. If economics is to advance as a social science, diverse accounts of contemporary economic phenomena should be subjected to comparative empirical testing. In this paper a first attempt is made to appraise empirically one aspect of these three competing microeconomic theories: their explanations of industry-level profit differentials. Each theory provides a different explanation of the profit margin on sales. Since all three theories recognize that costs are included in output price, focusing on the differentials of the markup in effect provides a basis for testing the theories of unit price. However, as will be seen, our results do not provide a clear empirical differentiation. The alternative predictions are embedded in complex economic theories which are capable of developing alternative scenarios to explain the evidence presented below. Nevertheless, this evidence can help direct future theoretical work into relevant directions. Further empirical work must begin to test the actual mechanisms posted by the theories and possibly even deeper aspects of each approach. We only skim the surface of such our second set of empirical results investment. Hopefully, the real value of this research is that it will act as a base for further and deeper correspondence tests of these three competing theories.

Site uncertainty, allocation uncertainty, and superfund liability valuation

The amount and timing of a firm's ultimate financial obligation for contingent liabilities is uncertain and subject to the outcome of future events. We decompose uncertainty about Superfund contingent liabilities into two sources: (1) uncertainty regarding site clean-up cost ( site uncertainty); and (2) uncertainty regarding allocation of total site-clean-up cost across multiple parties associated with the site ( allocation uncertainty). We hypothesize that when a firm's contingent Superfund liabilities are subject to relatively more site and allocation uncertainty, these liabilities will be viewed as relatively risky. This risk will affect the firm's cost of capital. Thus, market valuation of contingent Superfund liabilities will be negatively affected. To empirically test our hypotheses we employ a cross-sectional model of the relation between firm market value and book value of assets, book value of liabilities, and a contingent Superfund liability proxy interacted with proxies for our uncertainty constructs. We find differential results across industries. In the chemical industry, both site and allocation uncertainty are associated with differential valuation of contingent Superfund liabilities. The greater the uncertainty, the more negatively the contingent Superfund liability is valued. Results are insignificant, however, in the paper and machinery industries. Our results provide evidence, at least in the most heavily involved industry, that site-level information of a non-financial nature can be relevant to financial statement users. This is consistent with accounting regulators' incorporation of site-level Superfund enforcement data in guidance regarding financial reporting for contingent Superfund liabilities. The concepts of site and allocation uncertainty, however, may provide a useful way for organizing and evaluating alternative site-level data when considering financial reporting alternatives.

Implementing EBO/EVA® Analysis in Stock Selection

The author modifies three inputs to the residual income models: the measurement of the book value of assets, the estimation of the discount rate, and the projection of the time period of abnormal earnings. The author calls his model the residual income valuation model (RIVM). One of the inputs to the model is the beginning book value of assets; the author separates the book value into perpetual value assets (e.g., land) and operating capital. Because of the fundamental differences in these assets, the author makes separate adjustments to each category.

Growth, Value, Good, and Bad

The growth-value and small-large scales are popular, but they suffer from two deficiencies: They are not grounded in theory, and they clear definition. Shefrin and Statman offered a remedy in a theory in which the quality scale-the scale that separates companies from bad-plays a central role. Here, the ratings in the Fortune survey of company quality are used as direct measures of perceptions of company quality and a proxy for the Fortune quality ratings is constructed from the BARRA, Inc., list of company characteristics. This quality scale has applications in style selection and style rotation. Categorizing companies along the growthvalue and small-large scales is now a common practice. Both scales are imperfect measures of quality, the scale that separates companies perceived as good from those perceived as bad. Good companies have such characteristics as management and products and services. The growth-value and small-large scales have gained widespread use because empirical evidence, such as that presented by Fama and French, shows significant differentials in stock returns along these scales.1 The growth-value and small-large scales have two deficiencies, however, one related to of theoretical foundation and one related to ambiguity in measurement and application. Black noted that no theory underlies the return differentials along the growth-value and small-large scales.2 Discussing the Fama and French findings, Black wrote lack of theory is a tipoff: watch out for data mining (p. 9). As to the measurement issue, no general agreement exists about the characteristics that distinguish from value. Some analysts use book-price ratios, others use earnings-price ratios, and still others use dividend yield. Moreover, the terms growth and often are robbed entirely of meaning. Bogle reported that, as of the end of 1992, Philip Morris Companies was the largest holding of both and value mutual funds.3 As to size, Chan and Chen point out that the distinction that matters is not the distinction between small and large companies but the distinction between financially distressed and financially healthy companies.4 Moreover, although size is most often measured as market value of equity, measures such as book value of assets are also used. Shefrin and Statman offered a remedy for the theoretical deficiency of the growth-value and small-large scales within a behavioral capital asset pricing model.5 Asset prices in the behavioral capital asset pricing theory are the outcome of an interaction between two kinds of traders-information traders and noise traders. Information traders know the relationship between characteristics of companies and the return distributions of the stock of these companies. In contrast, noise traders make systematic errors as they assess the relationship between characteristics of companies and the return distributions of the stocks of these companies. The error that is relevant here is representativeness, a cognitive heuristic described by Tversky and Kahneman.6 The error manifests itself in the belief that stocks are stocks of companies. Statman and Shefrin provide direct evidence that, on average, investors indeed believe that stocks are stocks of compa7 nies.

The Losses Realized in Bank Failures

This paper examines the losses realized in bank failures. Losses are measured as the difference between the book value of assets and the recovery value net of the direct expenses associated with the failure. I find the loss on assets is substantial, averaging 30 percent of the failed bank's assets. Direct expenses associated with bank closures average 10 percent of assets. An empirical analysis of the determinants of these losses reveals a significant difference in the value of assets retained by the FDIC and similar assets assumed by acquiring banks.

The Losses Realized in Bank Failures

ABSTRACTThis paper examines the losses realized in bank failures. Losses are measured as the difference between the book value of assets and the recovery value net of the direct expenses associated with the failure. I find the loss on assets is substantial, averaging 30 percent of the failed bank's assets. Direct expenses associated with bank closures average 10 percent of assets. An empirical analysis of the determinants of these losses reveals a significant difference in the value of assets retained by the FDIC and similar assets assumed by acquiring banks.

Direct Bankruptcy Costs: Evidence from the Trucking Industry

AbstractDirect costs of bankruptcy are measured for a sample of firms in the trucking industry that petitioned for bankruptcy protection from 1970 to 1985. Average direct bankruptcy costs represent 9.12 percent of the book value of total assets as of the year before filing. These costs are large compared with those reported in prior studies: 3.39 percent of book value of assets for retail firms, 4.31 percent for industrials, and .53 percent for railroads. We also find evidence of substantial economies of scale in bankruptcy costs in the trucking sample.

SIZE AND EARNINGS/PRICE RATIO ANOMALIES: ONE EFFECT OR TWO?

Studies of size and earnings/price ratio effects together have produced contradictory re? sults. Does one effect subsume the other or are there two separate effects? This paper demonstrates that equity returns are related to both size and earnings/price ratio as well as the month of January. Reinganum [20] and Basu [4] are reexamined to find the reasons for their contradictory results. Reinganum's finding that size subsumes earnings/price ratio is caused by a fortuitous choice of methods. Basu's finding that earnings/price ratio sub? sumes size appears to be sample-specific. This paper examines the implied standard deviation (ISD) estimated from transac? tions data on options, using the Black-Scholes pricing model. It was found that the distri? bution of the ISD is symmetric, though not normal. Also, the ISD based on the last daily observation deviates significantly from the daily average ISD. It is suggested that the daily average is a more reliable estimate of the standard deviation. Two distinct literatures find that the size of a company and its earnings/price ratio are systematically related to the company's equity rate of return. Peterson [19] showed that stocks with lower total book values of assets provided higher risk-adjusted rates of return than stocks with higher teftal invested capital. Banz [2] showed that stocks with lower market values outperformed stocks with larger market values by a significant margin.1 Starting with Nicholson [18], a long se? ries of papers presented ample evidence that higher earnings/price ratio or higher EP stocks provided higher risk-adjusted returns than lower EP stocks.2 The findings of all of these studies are inconsistent with the joint hypothesis of two-parameter capital asset pricing and efficient markets. Reinganum [20] questioned the separate existence of both the size and EP effects. He found that both effects were present in equity rates of return if the two effects were considered separately, but not when examined together:

Food, food prices and price/earning ratios

The book value of assets employed on U.S. farms is approximately six times the farm value of products shipped. Consequently, even at present price levels the return on assets in farming averages only three or four per cent. As farmers become more businesslike managers and as inherited assets decline in relative importance such a low rate of return will become intolerable. Accommodation will require either a collapse in farm land prices or a continued substantial increase in farm product prices. In the face of persistent excess world demand for food it is unlikely that land prices will decline appreciably. Therefore, farm product prices can be expected to continue to rise sharply throughout the foreseeable future.