Erik M. Vermeulen

A new approach to firm evaluation

In this paper, a method is developed to evaluate firms on the basis of the risks they face. In accordance with the multi-factor method, risk is represented as a vector of sensitivities to unexpected changes of risk factors. Subsequently, the sensitivities themselves are related to firm characteristics.In addition, an application of the method to interfirm comparison is presented. This application is illustrated by a numerical example based on estimates concerning real data. Apart from this application, some other possible future applications are mentioned. Finally, some decision support tools are presented which may enhance the usefulness of the method in practice.

The Application of the Multi-Factor Model in the Analysis of Corporate Failure

This paper describes an application of the multi-factor model to the analysis and prediction of corporate failure. The multi-factor model differs from the more usual methods of failure prediction because failure is conditioned on the values of a series of exogenous risk factors rather than on a series of “internal” financial ratio’s. Moreover, the multi-factor model is not primarily aimed at classifying firms in categories, but at modelling the influences of exogenous riskfactors, through sensitivities, on the firm’s cash flow generating process. The paper presents the general multi-factormodel and the conditional failure prediction model as bell as the possibilities to apply the model.

Visualizing Interfirm Comparison

In this paper, we present a new way to visualize the results obtained with interfirm comparison. It will be shown how these results can be visualized even if the explanatory variable is explained by more than one firm characteristic. As a result, the new visualization method enables us to see at a single glance: which firm has the highest explanatory variable, what the expected value of the explanatory variable is given the firms characteristics, what the corresponding values of its competitors are, and to what extent the different firm characteristics contribute to the firms expected value of the explanatory variable. The method is illustrated by a numerical example concerning Dutch retail industries.

Comparative performance evaluation under uncertainty

In this article we propose a multidimensional framework for comparative performance evaluation. The framework, CCPR, is elaborated and illustrated through a real-life case. The approach is that it takes account of and corrects for the influence of risks, which are beyond the control of the decision maker. Risk is viewed as a multidimensional measure and it is described in terms of sensitivities to unexpected changes of a multiplicity of risk factors. In addition, the approach corrects for differences in characteristics between the firms that are being compared. Some characteristics are fixed and thus beyond the control of the decision maker. Others may be changed and controlled by the decision maker. The approach also answers whether changes in firm characteristics as made by management have been appropriate or not.

Analyzing risk and performance using the multi-factor concept

textabstractIn this paper, we present a new model to analyze the risk and the expected level of firm performance. This model is based on the multi-factor approach to risk, in which unexpected performance is explained through sensitivities to unexpected changes of risk factors. Instead of using the multi-factor approach for the analysis of security portfolios, it is used to analyze performance measures of firms. In this paper the multi-factor approach is not only used to analyze risk, but also to analyze the expected level of performance. Furthermore, it is analyzed how instruments, as for instance projects, can be used to change the risk and the expected level of performance. An illustrative application in the field of finance is presented, although the model can also be applied in other areas.

Interfirm Performance Evaluation under Uncertainty, A Multi-Dimentional Framework

In this paper a multidimensional framework for performance evaluation is proposed, which is elaborated and illustrated through a reallife case. A particular feature of the approach is that it takes account of the influence of risks, which are beyond the control of the decision maker. Here risk is seen as a multidemensional measure; it is expressed by means of sensitivities to unexpected changes of a multitude of risk factors. Furthermore, the approach corrects for differences in operational characteristics between the firms that are being compared. Some operational characteristics are fixed and thus uncotrollable for the decision maker, whereas other operational characteristics may be changed and controlled by the decision maker. The approach also consider the fact that it might have been better to change some of the cotrollable firm characteristics