Papers Published in Journals

The domestic corporate zero coupon bond market virtually evaporated following passage of the Tax Equity and Fiscal Responsibility Act in 1982. But the corporate zero coupon Eurobond market continued to thrive. Its existence illustrates how differences in national tax systems can create attractive financing opportunities for companies in foreign capital markets. In addition, a form of arbitrage transaction involving the...

Contact us for more information.

Long-term contracts may contain valuable embedded options. I develop an alternative approach to traditional discounted cash flow (DCF) analysis for valuing the profits that are lost when a long-term contract is breached, resulting in the loss of potentially valuable options. One recent example concerns the much publicized supervisory goodwill contracts, some of which were scheduled to expire more than 30 years from the time the US government breached them. I illustrate the contingent-claims approach using this example. I develop a contingent-claims damages model and use it to measure the lostpro fits damages that two thrifts - California Federal Bank and Glendale Federal Bank - suffered when the US government terminated their long-dated goodwill options. The same analytical approach can be adapted to value other opportunities lost due to moral hazard risk.

"Comparable" valuation methods are a set of methods that use comparable situations to infer the value of a firm. The comparable company method of valuation is one such technique. Comparable valuation methods estimate a firm's value by multiplying a ratio estimated from comparable firms (valuation multiple) times the firm's earnings before interest, taxes, depreciation, and amortization (EBITDA), earnings before interest and taxes (EBIT), revenue, or some other performance measure. This article explains how to adjust the comparable company method for the value of corporate control. A demonstration is presented of the efficiency of the adjusted comparable company method to value a sample of 51 firms involved in highly leveraged transactions. The value of corporate control is embodied in the control premium. When an estimate of the industry control premium is not available, a control premium of 25% on the acquisition equity value can be used to obtain a rough approximation.

Contact us for more information.

Credit derivatives have the potential to alter fundamentally the way credit risk is originated, priced, and managed; they permit investors to diversify their credit risk exposure; and they enable the credit markets to reallocate credit risk exposures to those market participants who are best equipped to handle them. But as credit derivative use has grown, so has concern about whether users really understand the risks involved and whether these instruments are fairly priced. This primer explains how total return swaps work and how companies and investors can use them to manage their exposure to credit risk more effectively and to enhance their investment returns through better diversification.

I examined the stock market impact of the switch from flow-through to normalization in the ratemaking treatment of the tax savings from accelerated depreciation for 24 electric utilities that made the switch since 1970. I found that there was some tendency for an electric utility's common stock beta to shift downward as a result of the switch but that, in general, such shifts were not significant statistically. I also found that the stock market tended to react favorably to the switch but that this reaction generally did not give rise to abnormal returns. Finally, I found that the stock market's reaction to the switch appears to have become more muted in recent years. My results suggest that the switch from flowthrough to normalization has had a less pronounced market impact than the long list of purported benefits and the results of prior empirical research might have led one to expect. I argued that investor concerns regarding other aspects of the rate order authorizing the switch might be responsible for this. This would imply that if, as a result of the Economic Recovery Tax Act of 1981, utility commissions authorize the switch to normalization and do not make offsetting adjustments and can convince investors of this, the switch could have a significant market impact, the results reported herein notwithstanding. In other words, the results reported in this paper do not imply that the switch from flow-through to normalization cannot have a significant market impact; rather, they suggest that investors pay attention to the totality of a rate order and not to any single component in isolation and that, on balance, they may have become increasingly concerned in recent years that utility regulatory commissions might have depressed allowed rates of return or taken other actions that would largely offset the beneficial effects of the switch to normalization.

A study investigates the behavior of equity, bond horizon, small stock, and default risk premiums during the 1926-1989 period. The data suggest that the processes generating these risk premiums are generally mean-reverting, with the nominal default risk premium being an exception. The data also suggest that the stochastic processes generating these risk premiums are trending downward over time, with the possible exception of the small stock risk premium, which, although trending downward, was not found to have a statistically significant trend. The test for volatilities of risk premiums showed that the volatilities of the equity, capital gains equity, and small stock risk premiums (both nominal and real) have declined over time. However, the volatilities of the horizon and capital gains horizon risk premiums seem to have risen, which seems inconsistent with their declines in mean. These findings imply that using the historical average risk premium as the forecast for the risk premium for some future period can bias financial decision making.

One of the fundamental models of common stock valuation holds that a company's share price is equal to the discounted value of its Future dividend stream. Several versions of the basic model have appeared in the literature, among them some noteworthy early contributions [8, 9, 11, 15]. In the continuous time models, dividends are assumed to be paid continuously, and the ex-dividend date is, as a result...