PRICING DEFAULT RISK WITH PARISIAN OPTIONS: EMPIRICAL EVIDENCE FROM HIGH GROWTH COMPANIES

2009 ◽  
Vol 05 (01) ◽  
pp. 0950001
Author(s):  
EPHRAIM CLARK ◽  
SÉLIMA BACCAR
Keyword(s):  
Financial Distress ◽  
Firm Value ◽  
Default Risk ◽  
High Growth ◽  
Comparative Statics ◽  
Barrier Option ◽  
Parisian Options ◽  
Growth Firms ◽  
Bankruptcy Procedure

In the stock market crash of 2000 many internet firms that were ostensibly bankrupt were able to stave off bankruptcy by seeking protection under Chapter 11 or avoid it completely through refinancing or merging with another company. The implication is that these firms had a de facto option to choose when to default and that this option had substantial value. This paper builds on this insight and investigates how the value of a company is affected by the default option and the choice of the relevant bankruptcy procedures. We use a Parisian barrier option framework and extend Schwartz and Moon's (2000) contingent claim model, which implies only a Chapter 7 bankruptcy procedure, to allow for the more general bankruptcy procedure of Chapter 11. We consider bankruptcy procedures that are explicitly based on the time spent in financial distress and include a "grace" period in the model to more realistically capture the effects of default risk on firm value. Finally, we develop an efficient Monte Carlo method to price approximations for the Parisian options. Some numerical results and comparative statics are also performed to demonstrate the characteristics of cumulative and consecutive Parisian options and investigate their effects on the value of high growth firms.

scholarly journals Debt Maturity Structure, Firm Value and Underinvestment Incentive - The Case of Pakistan

2018 ◽  
Vol 6 (2) ◽  
pp. 1-26
Author(s):  
Syed Sikander Ali Shah ◽  
Ali Murad Syed ◽  
Sana Sheikh
Keyword(s):  
Firm Value ◽  
Investment Decisions ◽  
High Growth ◽  
Potential Interaction ◽  
Debt Maturity ◽  
Dynamic Adjustment ◽  
Ex Post ◽  
Maturity Structure ◽  
Growth Firms ◽  
Financing And Investment

This study examines the potential interaction of a firm’s financing and investment decisions. It studies broadly how firms manage underinvestment and liquidity risks. To estimate the effects of these decisions, the study has incorporated four simultaneous equations using the partial dynamic adjustment model. Panel data of non-financial Pakistani firms have been used in this study. The findings of this study demonstrate that Pakistani high growth firms depend on high-leverage strategies and give greater importance to underinvestment risk rather than liquidity risk. Furthermore, growing Pakistani firms are not adopting low-leverage strategies ex ante to participate in future growth opportunities ex post. This study also examines whether or not Pakistani firms are paying special attention to the mixing of debt maturity that affects the firm’s investment decisions and its value.

scholarly journals Insolvency Risk and Value Maximization: A Convergence between Financial Management and Risk Management

Risks ◽  
2021 ◽  
Vol 9 (6) ◽  
pp. 105
Author(s):  
Alessandro Gennaro
Keyword(s):  
At Risk ◽  
Simulation Model ◽  
Financial Distress ◽  
Financial Management ◽  
Firm Value ◽  
Default Risk ◽  
Continuous Assessment ◽  
Financial Policies ◽  
Insolvency Risk ◽  
Value Maximization

This conceptual paper focuses on the relationship between insolvency, capital structure, and value creation. The aim is twofold: to define risk-based capital measures able to absorb the effects of financial distress and avoid corporate default; and to verify conditions and limits of use of these measures in corporate financial policies. The capital measures based on insolvency risk will be defined by recalling the concepts of Cash Flow-at-Risk and Capital-at-Risk. A first check on the usefulness of these risk-based measures and their consistency with the principle of value maximization is carried out through a simulation model. The scenario analysis allows us to examine how financial and risk policies oriented by insolvency avoidance affect the firm value. According to evidence from the simulation model, these measures appear to be useful in lowering the default risk, but they require a continuous assessment of their impact on the firm value.

scholarly journals The Impact Of CoCo Bonds On Bank Value And Perceived Default Risk: Insights And Evidence From Their Pioneering Use In Europe

2015 ◽  
Vol 31 (6) ◽  
pp. 2297 ◽  
Author(s):  
Carolin Schmidt ◽  
Ted Azarmi
Keyword(s):  
Financial Distress ◽  
Firm Value ◽  
Default Risk ◽  
Credit Default Swap ◽  
Poor Performance ◽  
Credit Default ◽  
Negative Effect ◽  
Financial Decision ◽  
Credit Default Swap Spread ◽  
The Impact

Contingent convertible (CoCo) bonds convert to equity during financial distress. They help transfer the responsibility for bearing the costs of poor performance from the taxpayers to the bank owners. Our results are thus relevant for investors, financial decision-makers, and regulators. We analyze the effects of the pioneering use of CoCos in Europe by Lloyds Banking Group in 2009. The bank’s motivation for the issue is explored, considering both its economic situation and the Basel III regulations. We document a reduction in the bank’s market value following the announcement of the intention to issue CoCos. Simultaneously, the credit default swap spread goes up. This study suggests that CoCos can have a negative effect on a bank’s creditworthiness and firm value.

Earnings Management, Litigation Risk, and Asymmetric Audit Fee Responses

2006 ◽  
Vol 25 (1) ◽  
pp. 85-98 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker ◽  
Gary F. Peters
Keyword(s):  
Earnings Management ◽  
High Growth ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Litigation Risk ◽  
Audit Fee ◽  
Growth Firms ◽  
Price Earnings Ratio ◽  
Year 2000 ◽  
Conservative Bias

This study examines the association between audit fees and earnings management, using publicly available fee data. We hypothesize that, due to asymmetric litigation effects, audit fees decrease (increase) with a client's risk of income-decreasing (increasing) earnings management risk. We also hypothesize that the positive relation between income-increasing earnings management risk and audit fees is heightened for clients that are high-growth firms. We test our hypotheses with a sample of 429 public, non-regulated, Big 5 audited companies, using fee data for the year 2000. We find that downward earnings management risk, as estimated by negative (i.e., income-decreasing) discretionary accruals, is associated with lower audit fees. We also document that upward earnings management risk, as estimated by positive discretionary accruals, is associated with higher audit fees and that the interaction of this risk with an industry-adjusted price-earnings ratio has an incrementally significant, positive effect on fees. We interpret our findings as consistent with a conservative bias on the part of auditors. The conservative bias arises from asymmetric litigation risk in which income-increasing discretionary accruals exhibit greater expected litigation costs than income-decreasing discretionary accruals (Simunic and Stein 1996; Palmrose and Scholz 2004; Palmrose et al. 2004; Richardson et al. 2002; Heninger 2001).

Explaining the Growth Potential of a Market Leader and Challenger: Evidence from Japan’s Telecommunications Services Industry

2021 ◽  
pp. 227853372198952
Author(s):  
Mostafa Saidur Rahim Khan ◽  
Naheed Rabbani
Keyword(s):  
High Growth ◽  
Growth Potential ◽  
Book Value ◽  
Good Investment ◽  
Growth Firms ◽  
Price Earnings Ratio ◽  
Equity Ratio ◽  
Market Leader ◽  
Services Industry ◽  
Telecommunications Services

This study examines the growth potential of the market leader and market challenger in Japan’s telecommunications services industry. We focus on Nippon Telegraph and Telephone Corporation (NTT) and KDDI, the market leader and challenger (respectively) in terms of sales revenue, total assets, and market share. Following finance literatures, we use higher values of price–earnings ratio (P/E) and market-to-book-value-of-equity ratio (MV/BV) as the indicators of growth potential. High growth firms have the potential to outperform the overall market over a significant period of time providing a good investment opportunity for retail and institutional investors. This study uses financial data of the NTT and KDDI from the period between 2001 and 2016 and applies several regression models to examine the growth potential of the market leader and market challenger in Japan’s telecommunications services industry. Using the P/E and MV/BV as indicators of growth potential, we show that the market challenger’s growth potential is significantly higher than that of the market leader, even after controlling for firm size, liquidity, profitability, leverage, cash flow, and age.

scholarly journals Myth-busting and entrepreneurship policy: the case of high growth firms

2017 ◽  
Vol 29 (5-6) ◽  
pp. 414-443 ◽  
Author(s):  
Ross Brown ◽  
Suzanne Mawson ◽  
Colin Mason
Keyword(s):  
High Growth ◽  
Entrepreneurship Policy ◽  
Growth Firms
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