Firm Asset Value Research Articles

Influence Analysis of Media Supervision in Corporate Governance

This article presents the importance of the role of media supervision in corporate governance by adopting stochastic dynamic optimal method of analysis. It also studies the influence of media supervision on embezzlement behaviour of large shareholders. Research demonstrates that when the occupation ratio of large shareholders is low and the intensity of media exposure is not high, fall in the value of firm assets is not obvious and, large shareholders can continue to improve occupation ratio to achieve higher welfare. After the occupation ratio of large shareholders reaches a certain level, their welfare loss because of media exposure damages firm asset value more than their income by occupation. Then, large shareholders continue to improve occupation ratio which will not only prevent maintenance of welfare level, but will also result in welfare loss. If the occupation ratio is improved through unfair means, they must give up illicit occupation. In addition, it further demonstrates that conspiracy of large shareholders and media will make them more likely to improve their own welfare by encroaching upon the interests of small shareholder. Based on the corporate governance practices of listed biotechnology and pharmaceutical companies in China, this article analyses the impact of media supervision upon these entities, products and processes.

On Modeling Economic Default Time: A Reduced-Form Model Approach

In the aftermath of the global financial crisis, much attention has been paid to investigating the appropriateness of the current practice of default risk modeling in banking, finance and insurance industries. A recent empirical study by Guo et al. (Rev Deriv Res 11(3): 171–204, 2008) shows that the time difference between the economic and recorded default dates has a significant impact on recovery rate estimates. Guo et al. ( http://arxiv.org/abs/1012.0843 , 2011) develop a theoretical structural firm asset value model for a firm default process that embeds the distinction of these two default times. In this paper, we assume the market participants cannot observe the firm asset value directly and we develop reduced-form models for characterizing the economic and recorded default times. We derive the probability distributions of these two default times. Numerical experiments with empirical data are given to demonstrate the proposed models. Our approach helps researchers to gain a new perspective for economic and recorded defaults and is more feasible in general practice compared with current method. Our results can also contribute to the understanding of the impacts of various parameters on the economic and recorded default times.

Calibrating structural models: a new methodology based on stock and credit default swap data

This paper presents a modified version of Leland and Toft's [J. Finance, 1996, 51, 987–1019] structural credit risk model, together with a novel calibration methodology based on stock and CDS data: the firm asset value and volatility are consistently derived from equity prices; the default barrier is calibrated from CDS premia. It empirically shows that as long as the appropriate default barrier is selected, the model generates time series of stock market implied credit spreads that fit the times series of CDS spreads. Moreover, CDS implied default barriers prove to be consistent with stockholders’ rationality, with predictions made by structural models with endogenous default, and with historical recovery rates.

Fair Valuation of Equity-Linked Policies under Insurer Default Risk

We consider the problem of computing the fair value of equity-linked policies with an interestrate guarantee when the insurer is subject to credit risk. The framework is developed based on modern financial theory using the no-arbitrage principle. In this context, an equity-linked policy is considered as a vulnerable contingent claim that expires before maturity if the firm asset value reaches a prespecified default threshold depending on the firm’s liabilities. We derive a closedform formula in a continuous-time environment to compute the fair value of the contract. We also develop a discrete-time model that allows us to address fair evaluation when the policy embeds a surrender option.

Pricing credit default swaps under Lévy models

Most structural models for credit pricing assume Geometric Brownian motion to describe the firm asset value. However, the underlying lognormal distribution does not match empirical distributions, typically skewed and leptokurtic. Moreover, defaults are usually driven by shocks, which are not captured by the continuous paths of Brownian motion. We assume the asset price process is driven by a pure-jump Levy process and default is triggered by the crossing of a preset barrier. Our model incorporates asymmetry, fat-tail behaviour, jumps and instantaneous defaults. Under this model we price Credit Default Swaps, detailing the calculations for the Variance Gamma process.

Finite-time dividend–ruin models

We consider the finite-time horizon dividend–ruin model where the firm pays out dividends to its shareholders according to a dividend-barrier strategy and becomes ruined when the firm’s asset value falls below the default threshold. The asset value process is modeled as a restricted Geometric Brownian process with an upper reflecting (dividend) barrier and a lower absorbing (ruin) barrier. Analytical solutions to the value function of the restricted asset value process are provided. We also solve for the survival probability and the expected present value of future dividend payouts over a given time horizon. The sensitivities of the firm asset value and dividend payouts to the dividend barrier, volatility of the firm asset value and firm’s credit quality are also examined.

Finite Time Dividend-Ruin Models

We consider the finite time horizon dividend-ruin model where the firm pays out dividends to its shareholders according to a dividend-barrier strategy and becomes ruined when the firm asset value falls below the default threshold. The asset value process is modeled as a restricted Geometric Brownian process with an upper reflecting (dividend) barrier and a lower absorbing (ruin) barrier. Analytic solutions to the value function of the restricted asset value process are provided. We also solve for the survival probability and the expected present value of future dividend payouts over a given time horizon. The sensitivities of the firm asset value and dividend payouts to the dividend barrier, volatility of the firm asset value and firm's credit quality are also examined.

Corporate Debt Value, Bond Covenants, and Optimal Capital Structure

ABSTRACTThis article examines corporate debt values and capital structure in a unified analytical framework. It derives closed‐form results for the value of long‐term risky debt and yield spreads, and for optimal capital structure, when firm asset value follows a diffusion process with constant volatility. Debt values and optimal leverage are explicitly linked to firm risk, taxes, bankruptcy costs, risk‐free interest rates, payout rates, and bond covenants. The results elucidate the different behavior of junk bonds versus investment‐grade bonds, and aspects of asset substitution, debt repurchase, and debt renegotiation.

Corporate Debt Value, Bond Covenants, and Optimal Capital Structure

This paper examines corporate debt values and capital structure in a unified analytical framework. It derives closed form results for the value of long-term risky debt and yield spreads, and for optimal capital structure, when firm asset value follows a diffusion process with constant volatility. Debt values and optimal leverage are explicitly linked to firm risk, taxes, bankruptcy costs, riskfree interest rates, payout rates, and bond covenants. The results elucidate the different behavior of junk bonds vs. investment grade bonds, and aspects of asset substitution, debt repurchase, and debt renegotiation.