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 Increasing Company Value Through Financial Policies and Performance of Manufacturing Companies Listed on The Indonesia Stock Exchange

At-Taqaddum ◽  
2021 ◽  
Vol 13 (1) ◽  
pp. 39-56
Author(s):  
Adhi Widyakto ◽  
Endang Tri Widyarti ◽  
Edy Suryawardana
Keyword(s):  
Financial Performance ◽  
Financial Management ◽  
Firm Value ◽  
Manufacturing Industry ◽  
Stock Exchange ◽  
Practical Implication ◽  
Sampling Technique ◽  
Financial Policy ◽  
Manufacturing Companies ◽  
Financial Policies

The phenomenon that there are still many manufacturing industry companies on the Indonesia Stock Exchange that have a PBV smaller than one is the main basis for conducting the study. This study aims to analyze the effect of financial policy and financial performance on firm value. The sampling technique was based on purposive sampling. The data analysis technique used a linear regression model. Based on the analysis and discussion results, there are four main findings obtained from this study: First, the model used is significant to explain changes in firm value with the ability to explain 48.7 percent. Second, of the five independent variables, there are three variables: the policy in working capital management and the performance variable, namely the volatility of expectations and returns, which have a significant effect. To the value of the company. Third, the company's financial performance factors have a more dominant influence on the company's value dynamics than policy factors. Fourth, the direction coefficient of the influence of the independent variable on the dependent variable, although the two variables are not significant. The practical implication is to increase the value of a manufacturing company. Therefore, it is advisable to consider financial policies and financial performance. Theoretically, financial management based on signal theory and trade-off theory of Islamic perspective theory can increase firm value.

scholarly journals The Structured Hedging of Financial Value: With Applications to Foreign Exchange Risk Management

2021 ◽  
Author(s):  
◽  
Zhenghong Zhu
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Foreign Exchange ◽  
Financial Distress ◽  
Firm Value ◽  
Value At Risk ◽  
Optimal Decision ◽  
Foreign Exchange Risk ◽  
Exchange Risk ◽  
Exchange Risk Management

<p>The objective of the thesis is to develop a structured financial hedging framework that is empirically implementable and consistent with a corporate finance perspective. Value at risk provides a suitable framework for this purpose. The aversion implied in the value at risk and its generalised theory arises from a firm's concerns about contingent financial distress costs, which can be considered as the payoff of a put option written by stockholders of firms in favour of third parties. This enables the development of a hedging framework to explore how a firm's welfare might be enhanced by replacing natural exposures with hedged outcomes. An ideal hedging decision is to maximise the financial value in good times at minimal cost in terms of the generalised value at risk penalty function. In an efficient market, a fully hedged policy using forwards is generally the optimal decision, while alternatives should be taken into account where markets are not efficient. In such cases, the underlying empirical methodology should be able to detect inefficiencies and feed into the objective functions for maximising firm value. The empirical implementation is explored with a variety of econometric methodologies. These include the development of new semi-parametric or nonparametric techniques based upon wavelet analysis, as well as an incomplete forecasting algorithm. Such methods have been preferred to classical linear and stationary models, because they have broader application in an inefficient market where information is technically fuzzy and financial data may exhibit non-linearity or non-stationarity. Further decision dimensions concern exposure duration or path risk, in which individuals' perspectives of risk is time-dependent and linked to the evolution of value at risk through time. The proposed approaches find their main application in foreign exchange risk management, a topic of considerable importance and sensitivity in New Zealand. A statistically well-adapted hedge object for an exporter such as the dairy industry is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. Further applications are to strategic fund management where the objective is to derive optimal foreign exchange forwards based hedges.</p>

scholarly journals The Structured Hedging of Financial Value: With Applications to Foreign Exchange Risk Management

2021 ◽  
Author(s):  
◽  
Zhenghong Zhu
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Foreign Exchange ◽  
Financial Distress ◽  
Firm Value ◽  
Value At Risk ◽  
Optimal Decision ◽  
Foreign Exchange Risk ◽  
Exchange Risk ◽  
Exchange Risk Management

<p>The objective of the thesis is to develop a structured financial hedging framework that is empirically implementable and consistent with a corporate finance perspective. Value at risk provides a suitable framework for this purpose. The aversion implied in the value at risk and its generalised theory arises from a firm's concerns about contingent financial distress costs, which can be considered as the payoff of a put option written by stockholders of firms in favour of third parties. This enables the development of a hedging framework to explore how a firm's welfare might be enhanced by replacing natural exposures with hedged outcomes. An ideal hedging decision is to maximise the financial value in good times at minimal cost in terms of the generalised value at risk penalty function. In an efficient market, a fully hedged policy using forwards is generally the optimal decision, while alternatives should be taken into account where markets are not efficient. In such cases, the underlying empirical methodology should be able to detect inefficiencies and feed into the objective functions for maximising firm value. The empirical implementation is explored with a variety of econometric methodologies. These include the development of new semi-parametric or nonparametric techniques based upon wavelet analysis, as well as an incomplete forecasting algorithm. Such methods have been preferred to classical linear and stationary models, because they have broader application in an inefficient market where information is technically fuzzy and financial data may exhibit non-linearity or non-stationarity. Further decision dimensions concern exposure duration or path risk, in which individuals' perspectives of risk is time-dependent and linked to the evolution of value at risk through time. The proposed approaches find their main application in foreign exchange risk management, a topic of considerable importance and sensitivity in New Zealand. A statistically well-adapted hedge object for an exporter such as the dairy industry is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. Further applications are to strategic fund management where the objective is to derive optimal foreign exchange forwards based hedges.</p>

scholarly journals Enterprise Risk Management, Insurer Value Maximisation, and Market Frictions

2008 ◽  
Vol 38 (01) ◽  
pp. 293-339 ◽  
Author(s):  
Shaun Yow ◽  
Michael Sherris
Keyword(s):  
Risk Management ◽  
Financial Distress ◽  
Firm Value ◽  
Enterprise Risk Management ◽  
Market Imperfections ◽  
Demand Elasticity ◽  
Value Maximization ◽  
Enterprise Risk ◽  
Financial Quality ◽  
The Impact

Enterprise risk management has become a major focus for insurers and reinsurers. Capitalization and pricing decisions are recognized as critical to firm value maximization. Market imperfections including frictional costs of capital such as taxes, agency costs, and financial distress costs are an important motivation for enterprise risk management. Risk management reduces the volatility of financial performance and can have a significant impact on firm value maximization by reducing the impact of frictional costs. Insurers operate in imperfect markets where demand elasticity of policyholders and preferences for financial quality of insurers are important determinants of capitalization and pricing strategies. In this paper, we analyze the optimization of enterprise or firm value in a model with market imperfections. A realistic model of an insurer is developed and calibrated. Frictional costs, imperfectly competitive demand elasticity, and preferences for financial quality are explicitly modelled and implications for enterprise risk management are quantified.

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 Enterprise Risk Management, Insurer Value Maximisation, and Market Frictions

2008 ◽  
Vol 38 (1) ◽  
pp. 293-339 ◽  
Author(s):  
Shaun Yow ◽  
Michael Sherris
Keyword(s):  
Risk Management ◽  
Financial Distress ◽  
Firm Value ◽  
Enterprise Risk Management ◽  
Market Imperfections ◽  
Demand Elasticity ◽  
Value Maximization ◽  
Enterprise Risk ◽  
Financial Quality ◽  
The Impact

Enterprise risk management has become a major focus for insurers and reinsurers. Capitalization and pricing decisions are recognized as critical to firm value maximization. Market imperfections including frictional costs of capital such as taxes, agency costs, and financial distress costs are an important motivation for enterprise risk management. Risk management reduces the volatility of financial performance and can have a significant impact on firm value maximization by reducing the impact of frictional costs. Insurers operate in imperfect markets where demand elasticity of policyholders and preferences for financial quality of insurers are important determinants of capitalization and pricing strategies. In this paper, we analyze the optimization of enterprise or firm value in a model with market imperfections. A realistic model of an insurer is developed and calibrated.Frictional costs, imperfectly competitive demand elasticity, and preferences for financial quality are explicitly modelled and implications for enterprise risk management are quantified.

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.

A Single Period Stochastic Model for Maximising Firms Value

GIS Business ◽  
2016 ◽  
Vol 11 (6) ◽  
pp. 39-45
Author(s):  
J. P. Singh
Keyword(s):  
Capital Market ◽  
Firm Value ◽  
Capital Asset Pricing ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Value Maximization ◽  
Risk Return ◽  
Bankruptcy Costs ◽  
Single Period ◽  
Debt Capacity

This article sets up a single period value maximization model for the firm based on stochastic end-of-period cash inflows, stochastic bankruptcy costs and taxes based on income rather than wealth. The risk-return trade-off is captured in the Capital Asset Pricing Model. Thus, the model also assumes a perfect capital market and market equilibrium. The model establishes the existence of a unique optimal financial leverage at which the firm value is maximized, this leverage being less than the maximum debt capacity of the firm.

Buyer’s Bankruptcy Risk, Sourcing Strategy, and Firm Value: Evidence from the Supplier Protection Act

2021 ◽  
Author(s):  
Karca D. Aral ◽  
Erasmo Giambona ◽  
Ye Wang
Keyword(s):  
Operations Management ◽  
Financial Distress ◽  
Firm Value ◽  
Trade Credit ◽  
Treated Group ◽  
Control Group ◽  
Regulatory Change ◽  
Data Set ◽  
Bankruptcy Risk ◽  
Sourcing Strategy

What should a distressed buyer’s sourcing strategy be? We find that this depends on the dynamics in a potential in-court bankruptcy. To establish causality, we use a novel sourcing data set in combination with a unique quasi-natural experimental setting provided by a regulatory shock that significantly strengthened the protection granted to suppliers when a distressed buyer files for bankruptcy: the Supplier Protection Act. We find that, following this regulatory change, the number of suppliers for buyers near financial distress (those most affected by the act, the treated group) increased by nearly 35% relative to financially sound firms (the control group). We also find that this shift allowed distressed buyers to obtain more trade credit, expand inventory holdings, and increase performance, leading to an overall increase in firm value of 7.2%. In turn, these effects led to a sizable reduction in the probability of the affected buyers defaulting and filing for bankruptcy. Our results have important implications for corporate executives: right-sizing the supply base can be critical for buyers near financial distress, and implementing policies to engage and protect suppliers can be the way out of distress. This paper was accepted by Vishal Gaur, operations management.

Living beyond one’s means: evidence from Malaysia

2015 ◽  
Vol 43 (1) ◽  
pp. 2-18 ◽  
Author(s):  
Yiing Jia Loke
Keyword(s):  
Low Income ◽  
Financial Literacy ◽  
Financial Distress ◽  
Financial Management ◽  
Practical Knowledge ◽  
Financial Education ◽  
Financial Knowledge ◽  
Content Type ◽  
Explanatory Variables ◽  
Financial Behaviour

Purpose – The purpose of the paper is to identify the determinants of the probability of living beyond one’s means. The paper also explores the coping mechanisms of those financially distressed as well as the debt taking behaviour of consumers. Design/methodology/approach – The study uses data obtained from the OECD International Network on Financial Education pilot study on Measuring Financial Literacy in 2010 for the case of Malaysia. A logistic regression model is used to identify the main determinants of the probability that a consumer will live beyond his/her means. The analysis is carried out by using a set of socio-economic factors and the individual’s financial behaviour and attitudinal characteristics as explanatory variables. Findings – The findings indicate that low income and seasonal income earners are more vulnerable to financial distress. Furthermore, having a higher education, higher financial knowledge and prudent financial behaviour and attitude do not necessarily translate into better financial management. Family and friends provide the main source of financial assistance in times of need. Research limitations/implications – The assessment of financial knowledge should go beyond individual’s knowledge on financial concepts and theories. Practical knowledge on financial and cash flow management should be assessed. Practical implications – The study reiterates the importance of financial education. It is imperative to include financial education as part of the schools’ curriculum and also to be incorporated as part of the Continuous Professional Development modules for working adults. Originality/value – The study is based on the first nationwide study of consumer finances in Malaysia. It contributes to the literature by integrating financial behaviour and attitudinal factors into the analysis of the ability of individuals to live within their means. The findings also show the limitations of the existing self-assessment of financial behaviour and attitude and the assessment of financial knowledge.

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