Current Asset Value Research Articles

A Real Options Approach to Bankruptcy Costs: Evidence from Failed Commercial Banks During the 1990s

Literature to date has identified three main aspects of liquidation time: Firm size, asset specificity, and industry concentration. The present paper unifies the theory behind these three aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee. In the options valuation framework, at time t the trustee may choose to 1) liquidate at current asset values and incur a known loss, or 2) hold until the next period t+1 at a positive opportunity cost. The trustee may not sell in the current period if expected asset price growth is sufficiently large. Expectations of asset price growth are based on previous asset price growth and asset price volatility, which are related to firm size, asset specificity, and industry concentration. Testing the hypothesized asset price relationships on FDIC failed bank liquidation data with OLS, three-stage least squares, and duration specifications yields the appropriate results. Furthermore, it appears that liquidation time alone can be used as an effective second order proxy for asset value growth where market value estimates are unavailable.

Feltham-Ohlson Framework: The Implication of Corporate Tax

In this paper, we provide an empirical work in order to test the tax-adjusted market valuation (residual income) model. Feltham-Ohlson's (1995) residual income model can be extended by adding corporate tax: firm market value is a function of the bottom line after-tax accounting data, e.g., book value and after-tax earnings. Under this tax-adjusted framework, certain issues are examined: the information from the firm's operating activities is not enough to measure the firm's market value; financial activities also affect firm market value. In particular, abnormal financial earnings are not equal to zero, due to the tax deduction on interest expenses. An empirical analysis, using the financial reporting data of Canadian firms for the years 1994-1999, demonstrates that the current book value of financial assets and operating assets, abnormal operating earnings, and abnormal financial earnings are all relevant to firm market value. The sensitivity tests, which define the corporate tax rates in different ways, do not change the results. The sensitivity test, which uses the financial analysts' forecasts, does not change the results, either. Furthermore, the empirical analysis shows that abnormal financial earnings enhance firm share price more when the firm has lower non-tax costs, i.e., firm business risk (financial distress) and bankruptcy costs. It supports the previous research on capital structure to the extent that debt financing benefits a firm more when non-tax costs are lower.

A financial model to determine the distortions in Economic Value Added (EVA) caused by inflation

This paper presents an algebraic model to study the extent to which inflation distorts Economic Value Added (EVA). The model consists of a theoretical firm in steady state, consisting entirely of projects with the same known internal rate of return. The EVA this firm reports is then calculated, and compared to the true economic profit calculated from the known return of the firm. The model shows that both conventional EVA and EVA based on the current value of assets are distorted by inflation. The distortion in the latter is more systematic, and this could form the basis of an adjusted EVA calculation to provide an estimate actual profitability.

A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads

This paper proposes a two-factor hazard rate model, in closed form, to price risky debt. The likelihood of default is captured by the firm's non-interest sensitive assets and defaultfree interest rates. The distinguishing features of the model are threefold. First, the impact of capital structure changes on credit spreads can be analyzed. Second, the model allows stochastic interest rates to impact current asset values as well as their evolution. Finally, the proposed model is in closed form, enabling us to undertake comparative statics analysis, compute parameter deltas of the model, calibrate empirical credit spreads, and determine hedge positions. Credit spreads generated by our model are consistent with empirical observations.

Dynamic Investment Strategies: Portfolio Insurance versus Efficient Frontier

Selected dynamic investment strategies are analyzed within a unifying theoretical framework. We suggest a Kolmogorov-type partial differential equation for a profit and loss (P&L) distribution of strategies contingent on the current value of the basic asset as well as on a balance of a trading account ?P&L-to-date. This gives a possibility to study much wider class of strategies than is usually done in the literature and practical applications. Using our equation we build dynamic efficient frontier and demonstrate that an attempt to minimize variance for a given expected profit leads to a contrarian trading strategy, also known as the St.Petersburg paradox. Similar analysis is performed for the Black-Jones-Perold constant proportion portfolio insurance (CPPI). It is shown that both, dynamic efficient frontier and CPPI, belong to a special class of power-option-replicating strategies. Despite its small Sharpe ratio CPPI has an advantage of controlled downside, as its PL distribution is far from gaussian. Conversely, Sharpe-optimal dynamic efficient frontier has an uncontrollable downside. We show how to blend the advantages of these two strategies. A special part is devoted to discrete analysis and risk capital considerations for non-replicating strategies when P&L-to-date is not a single-valued function of the current asset value and path-dependency is essential.

Ensuring cost effectiveness in support of training

This paper supports a theory that to maintain a competitive advantage in today's global business environment organisations must be able to effectively increase the speed of their employees' learning. An attempt has been made to address the issue that to be successful in the next century, businesses will have to alter the method of evaluating employees' knowledge, skill level and technological capability. In today's business environment, organisations must adapt quickly to changing opportunities that are only possible if their organisation's competencies, skills, knowledge, and technological capability are effective. To do so, it is believed that management must first inventory, and define the current asset value of their employees' "knowledge and skill level". Then they will have to implement an assessment method to determine the return on investment (ROI) from further employee training. This process requires management to have new tools to assist them in identifying and managing the organisation's investment in its knowledge base.

The performance of Japanese common stocks in relation to their net current asset values

Benjamin Graham's NCAV model as an investment strategy appears to be working in the Japanese equity markets. In this study, net current asset value is normalized by firm size and operationalized as (Current Assets-Total Liabilities)/Market Value of a firm abbreviated as NCAV/MV. Our results suggest that positive normalized NCAV portfolios tend to outperform the market on a risk-adjusted basis in Japanese equity markets, even after controlling for any confounding P/E effects, but appear sensitive to the investor's holding period.

AN EMPIRICAL ANALYSIS OF BEN GRAHAM'S NET CURRENT ASSET VALUE RULE

ABSTRACTThis paper presents evidence that the net current asset value rule developed by Ben Graham in 1930 is still profitable in the 1970s and early 1980s. The abnormal gain is not due to future mergers because both the merged and nonmerged subsamples have positive and statistically significant returns in the post‐event period.

Ben Graham’s Net Current Asset Values: A Performance Update

(1986). Ben Graham’s Net Current Asset Values: A Performance Update. Financial Analysts Journal: Vol. 42, No. 6, pp. 40-47.

Bank Capital Adequacy, Deposit Insurance and Security Values

Since the first owner of a gold depository discovered that profits could be made by lending some of the gold deposited for safekeeping, there has been a concern for the “capital adequacy” of depository institutions. The idea is simple enough. If the value of an institution's assets may decline in the future, its deposits will generally be safer, the larger the current value of assets in relation to the value of deposits. Defining capital as the difference between assets and deposits, the larger the ratio of capital to assets (or the ratio of capital to deposits) the safer the deposits. At some level capital will be “adequate,” i. e., the deposits will be “safe enough.”