Market Value Of Assets Research Articles

Why Do Financial Firms Borrow Short-Term? Debt Maturity and Information Production

The maturity of a firm's liabilities affects the information financiers produce about the firm’s assets. In my model, long-term financing creates an excessive tendency for financiers to acquire information and screen out lower quality borrowers. In contrast, short-term financing deters information production at origination but induces it when firms are forced to liquidate, depressing the market value of assets due to adverse selection. Through the feedback effect between firms' maturity structures and asset prices, increases in uncertainty can impair the aggregate volume of short-term financing and investment. The analysis can jointly rationalize i) the widespread use of short-term debt by financial firms, ii) periodic disruptions in short-term funding markets and iii) regulations that curb short-term funding markets in normal times and support them in periods of market stress.

Comment

Comment

Rational functions: an alternative approach to asset pricing

ABSTRACTThis paper shows that asset prices are linear polynomials of various underlying explanatory factors and asset returns being ratios of these polynomials, are rational functions that do not add linearly when averaging. Hence, average returns should be modeled based on stock prices. However, continuous returns may be treated as approximately linear across time and modeled directly. Our new Rational Function (RF) models, empirically outperform the traditional asset pricing models like the Capital Asset Pricing Model (CAPM) and the Fama–French three and five-factor models for both average and continuous returns. Moreover, the RF theory also provides a model to estimate the asset volumes. The average change in asset volumes together with average returns provide the estimates for average change in market values of assets. Thus, the RF model approach can be used to select assets that provide either highest returns for profit maximization or highest change in market values for wealth maximization for given levels of risk.

Predicting Probability of Debt Default: A Study of Corporate Debt Market in India and other Countries

Default by corporate is problem of concern for banking and financial services industry along with economy. Timely prediction of default is imperative for the bankers and regulators to devise and take preventive actions. There has been large numbers of studies across the world and in India too few studies conducted for Indian data. An extensive review of literature reveals that the subject of default prediction has not explored much in India. In India along with rest of the world, the numbers of defaults have been increasing every year. This creates scope for further studies. A comparative study has been conducted on the data of three countries, namely India, the US and the UK using four methods; MDA, logit, reduced form and structural models. The study for the Indian sample has developed 24 models for three methods; MDA, logit and reduced form model for two sample periods large sample period and small sample period on a sample of 2450 case over ten years from 1st April 2004 to 31st March 2014 and on two years data from 1st April 2014 to 31st March 2016, the developed models have been validated for the forward period as well as for the out of sample firms. Structural model has been tested on Indian data. The study for the American sample has developed three models for the three methods; MDA, logit and reduced form model. Structural model has been tested on American data. The study for the British sample has developed three models for the three methods; MDA, logit and reduced form model. Structural model has been tested on British data. So in this study total 30 models have been developed. The study uses multiple discriminant analysis and logistic regression analysis to calculate composite scores which are used to predict default. The structural model uses option mathematics to give probability of default with help of market value of assets, book value of debt and asset drift rate. Reduced form model uses Poisson regression to estimate intensity of default which is transformed into probability of default. The findings of the study for Indian sample suggest that logit model yields the highest classification accuracy of 97.7% and reduced form model yields the lowest classification accuracy of 82.3%. The models for small sample period are robust but classification accuracies for the models for large sample period are higher for different methods. The classification accuracies of 24 developed models for Indian sample has higher than many studies conducted in India and other countries. The findings of the study on American sample suggest that logit model yields the highest classification accuracy of 95% and structural model yields the lowest classification accuracy of 85.9% and classification accuracies of developed models higher than many studies. The findings of the study on British sample suggest that structural model yields the highest classification accuracy of 81.6% and reduced form model yields the lowest classification accuracy of 67.9%. The findings on variables suggest that all the three types of variables namely accounting, market and economic variables are significant for all the three samples from India, the US and the UK. In case of India, it is observed that all the variables which are significant for large sample period are significant for small sample period indicating the in long run firms tend to follow a certain pattern and default can be predicted with the help of a set of certain variables as far as default predict is concerned. However in short run market variables seem play minor role in default prediction. From the analysis of variables it is evident that total book value of debt with respect to total assets is the most important variable among all the variables with debt component. The biggest limitation of this study is that the models for small sample period are more robust while the models for large sample period have higher classification accuracy. The whole study is facing the problem of sample and selection biases.

An Assessment of Bank Financial Management in Lieu of Measuring and Managing Interest Rate Risk Case Study of BFFSL

Unexpected changes in interest rates can significantly alter a bank’s profitability and market value of equity. Interest rate risk encompasses this volatility. Depending on the cash flow characteristics of the Bank’s assets and liabilities, interest rate changes may raise or lower net interest income and the market value of assets and liabilities.

Risk Can Be Good: The Tradeoff Between Agency Conflicts, CEO Risk-Taking Incentives, and Credit Risk

We explore the trade-off between managerial risk-taking incentives and firm-level credit risk. Assuming that risk-taking incentives do not increase firm value, risk-taking incentives can lead to an asset substitution problem that hurts creditors. However, it is possible that risk-taking incentives will increase firm value, making creditors better off. Empirically, we find that credit rating agencies and credit default swap investors award more favorable credit ratings and credit default swap spreads, respectively, to firms that incentivize managers to engage in greater risk-taking behaviors. Consistent with recent theoretical research, we document a positive relation between managerial risk-taking incentives and firms' market value of assets. In addition, in a difference-in-differences specification, we find that increased risk-taking incentives lead to lower credit risk. Moreover, we document an incremental association between risk-taking incentives and credit risk for firms less likely to exhibit risk-shifting. Our paper is the first to empirically examine the trade-offs predicted by compensation theory from a creditor's perspective. Therefore, we extend prior literature by highlighting that creditors can benefit from risk-taking, suggesting that CEO risk-taking incentives can make both shareholders and bondholders better off. In the process, our results help reconcile conflicting views in the literature. In addition, we provide the first evidence on which firms benefit the most from risk-taking incentives: financially constrained firms. Collectively, our findings refine our understanding of why firms encourage managers to engage in risk-taking behavior.

Effect of Cash Holding Policy of Financially Constrained Firms on Their Market Performance

Our study is based on the methodology suggested by Faulkender and Wang (2006) in the Indian context, to discuss the various aspects of cash holding policy with respect to financially constrained (FC) and unconstrained firms. Primary goal of the study is to understand shareholders’ perception on the level of cash holdings in constrained and unconstrained firms, and how much value they give to excess cash holdings with respect to cash level and capital structure of a firm. This study also analyzes the shareholders’ perception, which is measured by stock return, and market value of asset, by determining the variation, in excess return and Tobin’s Q over the last 10 years. The result shows less or no effect of excess cash holding either in average firms or in constrained firms. Findings also suggests that shareholders, prefer large firms to maintain excess cash for investment, or to fulfil their liabilities on time. Overall the findings determine the importance of cash level but also indicate the presence of other determinants of the firms, to enhance market return and build shareholders perception.

Dynamic Agency and Investment Theory under Model Uncertainty

AbstractWe extend dynamic agency and investment theory by incorporating model uncertainty. As concerns regarding model uncertainty induce a trade‐off between incentives and ambiguity sharing, the principal tends to delay the cash payout to the agent. We find model uncertainty lowers the firm value, the average q and marginal q, where q is defined as the ratio between a physical asset's market value and its replacement value. Furthermore, model uncertainty leads to insufficient investment, which provides an alternative explanation for under‐investment. Finally, the optimal pay‐performance sensitivity of the agent's continuation value to the firm's output is state dependent and exceeds the lower bound when it is close to the payout boundary.

Testing the Hypothesis of the Adequacy of the Distance-To-Default as an Indicator of Changes in Banks’ Risk Exposures

A distance to default indicates the distance measured in standard deviations of the market value of assets from the default point. The hypothesis that distance to default is indicative of changes in the levels of risk of the banking system since it precedes accounting data that indicate similar changes was tested on the basis of selected financial ratios. We have applied a modification developed by Toda and Yamamoto of the standard Granger causality test to see whether there is causality between distance to default and the selected financial ratios. Contrary to expectations, we could only prove Granger causality from lagged values of distance to default (6 – 12 months) to a leverage ratio, whereas we were not able to obtain similar relationship with other ratios. DOI: 10.15458/85451.43

Investigating the Relationship between Capital Structure and Cash Resources Returns in the accepted Companies in the Securities Market

The purpose of determining the capital structure is to specify the composition of each company's financial resources in order to maximize the shareholders' wealth. Therefore, the present study examines the relationship between the effect of capital structure and the return on cash resources. The research population of this study includes the companies accepted in Tehran Stock Exchange during a five-year period (years 2010-2016). Finally, based on the research constraints and using the systematic elimination method, the information of 125 companies was gathered. The target research is an applied research. In terms of the type of research project, this research is post-event as it relies on the historical data and its derivation method is inductive and correlational. This research consists of three main hypotheses. In this research, linear regression has been used to test the hypotheses of the research. Eviews software has been used to analyze the data and test the hypotheses. After testing the research hypotheses, which were done separately for each hypothesis, we concluded that there is a meaningful relationship between cash-flow, the ratio of profit before interest and taxes and the ratio of market value of assets / book value of assets and the capital structure.

Assessing the Probability of Failure by Using Altman’s Model and Exploring its Relationship with Company Size: An Evidence from Indian

Corporate failure is the situation when a firm becomes unable to pay debts when they come due and the market value of assets becomes lower than its total liabilities. The purpose of the paper is to explore the relationship between firm size and probability of failure for Indian steel sector companies by employing regression model. Altman’s Z-score model has been used to derive the firm’s probability of failure, whereas total assets and total sales are utilized as indicators for firm’s size. The results indicate that size is inversely related to the probability of failure. With an increase in the size of the firm; probability of failure decreases and vice-versa.

Funding Ratio Peaks and Stalls

Virtually all investment plans share the ultimate goal of providing financial support for some class of beneficiaries. A plan’s long-term financial health is typically measured by its funding ratio—the market value of assets divided by the present value of liability. Although this funding ratio is intuitively appealing, it may be misleading because it represents only a momentary snapshot of plan sustainability. Even with a high initial value and reasonable return assumption, the funding ratio’s time-path (orbit) often shifts from a rise to a “stall” to a precipitous decline. In this article, we focus on how funding ratios evolve over time, using the concept of “fulfillment return” to clarify the limitations of the single-point funding ratio measure.

Discount Rates and Asset Returns: Implications for Endowment Strategies

Many endowments and foundations set the annual dollar amount available for current operations as the product of the market value of assets and a relatively fixed spending rate market value spending policy. We show that a market rate spending policy adjusting the percentage of beginning of year assets available for current operations with changes in discount rates/expected returns better meets the key endowment objectives of stable spending and intergenerational neutrality.Fixed spending rates violate intergeneratinoal neutrality. Declining expected returns cause dollar spending to increase with the associated asset value increase beyond sustainable levels which lowers future spending. Some current spending is at the expense of future spending. The opposite occurs when expected returns rise.Market rate spending policies maintain intergenerational neutrality by adjusting spending rates with expected returns. In addition, when discount rates decline (increase) the lower (higher) spending rate offsets some of the impact of the increase (decrease) in asset values. Thus spending is actually more stable with market rate spending when investing in assets whose values are more sensitive to discount rate changes, i.e. longer duration assets. The impact of discount rates on spending volatility can be driven to near zero with investable long duration assets.Monte Carlo simulation analysis shows that market rate spending applied to an equity portfolio reduces year over year spending volatility by over 30% (versus market value spending). Year over year spending volatility using market rate spending applied to a long duration fixed income portfolio is about 70% lower than year over year spending volatility using market value spending applied to a market duration portfolio.

The Use of Econometric Analysis for Interest Rate Risk, the Impact of GDP and Inflation Factor in Deposit Interest (the Case of Albania)

The risk, is an economic concept that gives the impression of a negative impact, unexpected event, condition upon which we can not influence. But it is important to distinguish between risk and danger as both are possible events in the future, but with different effects in conditions that can be affected. Not only the individual economic life, bot also businesses have faced different financial and business risks and its analysis is study object for many commercial units. Exposure to risk has affected in a way that many businesses and financial institutions should take the appropriate measures to protect against this exposure through the use of needed techniques for running it. Banks use different techniques in the management of risk, especially the risk of interest rates and that most used is funds GAP, as a technique, the size of which indicates the risk that bank the bear from changing interest rates and that is reflected in the net interest income. Which are the causes of this interest rate risk? Banks play a vital role in economic growth and in countries development, mainly through diversification of risk for themselves and other economic agents. Interest rate risk is one of the most important financial risks that bank faces. Interest rate risk is the possibility that changes in interest rates affect the interest income and the market value of assets of any investor. A large part of the income derived from net interest income, which comes as the difference between some asset items with the balance sheet liability items of the bank. Fluctuations in interest rates affect the interest rate and the value of the bank, making the management of interest rate risk to be vital to the success of a bank. Based on some basic concepts of risk theory, such as the target in terms of risk, event risk, the probability attached as well as the impact of event risk target, our paper aims to review the risk of interest rates as well as its main direction methods. Special attention was given in this paper to factors that influence the interest rate on deposits as well as assessing the impact of these factors on interest rate, by using an econometric model. The goal is the study of the dependence of the interest rate on deposits from GDP and the inflation rate. For the realization of this paper we have used the program Eviews through which it is established and is proven main hypotheses: if you change the level of GDP, exchange rates ALL / EUR and the rate of inflation, then the level of interest rates on deposits will be adapt to this change. Expressed in other words, the level of deposit interest rates, is depending on GDP, exchange rates ALL / EUR and the rate of inflation. DOI: 10.5901/ajis.2016.v5n3s1p177

The effects of public capital infusions on banks’ risk-shifting to the deposit insurance system in Japan

Using option pricing based models, we compute the actuarially fair deposit insurance premium and the market value of assets and asset volatility for Japanese banks as implied by their stock prices. The findings based on these variables suggest that banks shift risks to the deposit insurer who charges them risk insensitive premiums. Well-designed regulatory policies in response to the crisis, however, effectively restrain banks’ risk-shifting. Not only did the introduction of the prompt corrective action discipline insured banks, but large-scale public capital infusions successfully deleveraged banks whose assets are risky. This effectively mitigated banks’ risk-shifting.

On meeting capital requirements with a chance-constrained optimization model.

This paper deals with a capital to risk asset ratio chance-constrained optimization model in the presence of loans, treasury bill, fixed assets and non-interest earning assets. To model the dynamics of loans, we introduce a modified CreditMetrics approach. This leads to development of a deterministic convex counterpart of capital to risk asset ratio chance constraint. We pursue the scope of analyzing our model under the worst-case scenario i.e. loan default. The theoretical model is analyzed by applying numerical procedures, in order to administer valuable insights from a financial outlook. Our results suggest that, our capital to risk asset ratio chance-constrained optimization model guarantees banks of meeting capital requirements of Basel III with a likelihood of 95 % irrespective of changes in future market value of assets.

Investigate The Relationship Between Cost Management Strategy, Organization Size, Growth Options and The Performance Of Companies In Tehran Stock Exchange

This study aimed to investigate the relationship between cost management strategy, organization size and growth Options on the performance of the company. In this regard, the financial statements of 76 companies listed in Tehran Stock Exchange for the years 2009 to 2013 were analyzed. In this study, cost management strategy (the ratio of capital expenditure to sales, sales of the book value of fixed assets) and size (natural logarithm of total assets) and growth Options (market value of assets to book value of assets) as a variable. independent, and firm performance (return on assets, sales growth) was used as the dependent variable, so that the relationship between strategy, size, growth Options and firm performance during a 5-year period studied. The method used for data collection, library and field. To test the hypotheses of the model Autoregressive conditional heteroscedasticity (ARCH) and generalized regression model, the conditional heteroscedasticity (GARCH) were analyzed using the software Eviews8. And significance was determined using a Z score and likelihood ratio. The criteria for the variable sales strategy to sell the book value of fixed assets and the capital expenditure of a significant and positive relationship with sales growth. In the capital, Tehran Stock Exchange Market participants are recommended to consider it as the time-varying volatility and time efficiencies associated with corporate assets can be public relations strategy, cost management and growth Options of the company described. Also associated with the company's sales growth can be described by the relationship between the size and cost management strategy

Country Risk and Damages in Investment Arbitration

In investor–State international arbitrations, the claimant investor and respondent State often diverge on quantum. Disagreement over the appropriate discount for country risk is frequently an important cause of this divergence. In particular, investor-State tribunals have been split on whether the risk that the State may violate its foreign investment treaty obligations should lower damages awards. Country risk refers to the valuation discount caused by factors specific to the country in which the project is located. Such factors may include the relative stability of economic conditions (such as exchange rates) and social conditions (such as civil unrest). Country risk may also include the risk of unlawful State conduct, such as expropriation without full compensation and conduct that violates a State’s international legal obligations. A foreign investor that can invoke treaty protections may have a right of recovery for unlawful State conduct through international arbitration. But should a damages award set quantum assuming that the sovereign will in the future meet all of its legal obligations, or should it assume only that the specific violation being arbitrated did not occur? In other words, should the risk of future illegal State conduct lower the investor’s recovery? This issue matters because the observed or estimated market value of assets facing the possibility of future breaches can reflect a discount for the risk of illegal State conduct, especially if markets anticipate that the investor will not be fully compensated. The debate surrounding this question can be seen in three recent decisions involving claims against Venezuela. First, the Tribunal in Gold Reserve v Venezuela

Empirical Study on Market Value Balance Sheet (MVBS)

This paper presents the results of an empirical study on Market Value Balance Sheet (MVBS). The model thoroughly explained the relationship between market value of assets and market value of liabilities. This paper takes compustat stocks universe as sample size and conducted a series of cross-section studies on the Enterprise Value (EV) in the MVBS model. The results show great significance and illustrate that the MVBS Enterprise Value (EV) is consistent with market efficiency. This paper further concludes that an investor can outperform market with a higher Sharpe Ratio than market with a replica by holding a portfolio that buys the stocks with the largest increase of Enterprise Value (EV) and sells the stocks with the smallest increase (or largest decrease) of Enterprise Value (EV), which can be implemented in practice.

The Impact of Loan Capital on the Baltic Listed Companies’ Investment and Growth

Loan capital and investment made with the help of it, grant strategic competitive advantages to companies. Loan capital and investment often are the elements supplementing each other: growth in investment results in the growth of loan capital and vice versa. But the conflicts of interests between shareholders, managers and creditors precondition either underinvestment or overinvestment, which, in its turn, has a negative impact on corporate value. Such an ambiguous influence of loans on corporate investment and growth is one of relevant fields of corporate finance governance that requires extensive analysis. Empirical tests performed by different authors are based on the data analysis of developed countries’ companies and the obtained results are rather ambivalent. So far, no research into interaction between investing and financial decisions has been carried out in the Baltic countries. To investigate the impact of loan capital on the investment and growth of the Baltic companies, financial indicators of Lithuanian, Latvian and Estonian listed companies from the annual reports-prospectuses published by these companies were used. The research includes only non-financial companies’ data because financial institutions adopt specific decisions on investing and financing, which are preconditioned by other factors. The research covers the period of 2000-2006 and uses the data of 76 companies (data from all listed non-financial Baltic companies: 35 companies from Lithuania, 28 from Latvia, 13 from Estonia). To determine the strength of influence of corporate debts and other specific factors on investment, the multidimensional analysis of correlation between the level of investment and such indicators, as cash flow, debt ratio, the level of non-current debts, the ratio of debts and the market value of asset, growth possibilities, sales, was used. To check the reliability of the obtained correlation, the value p was used. The presented findings show statistically important values when the level of significance is 0.01 (i.e. correlation between indicators was considered reliable and significant, when p 1). The obtained results show that in the Baltic countries the constraining effect of debt was recorded only among the companies with high growth opportunities. In the meantime, the capital structure of companies with low growth opportunities had no clear impact current investing. The results of research into the impact of capital structure on the growth of Baltic companies show that a higher level of debts preconditions a lower corporate value and smaller opportunities of growth.