H.A. Rijken

Stock Market Valuation with Real Options: lessons from Netscape

Discounted cash flow is the main tool for valuing projects and companies. Real options techniques can augment valuation. The case of Netscape is used to demonstrate this. We begin with a defensive cash flow scenario. On top of this, we superimpose a number of real options valuations. Some experts would dispute our methodology because it is not built upon market-priced risk. Nonetheless, it provides an approximate valuation. We prefer equity valuation using various methodologies, including real options where appropriate, to arrive at a range of value. But we cannot, using financial logic, justify the high Netscape flotation price.

Anatomy of Bank Distress: The Information Content of Accounting Fundamentals within and Across Countries

This paper studies the information content of bank accounting fundamental data in the prediction of bank distress using an international sample of banks from 15 Western European countries and the U.S. during the financial crisis of 2007-12. We assemble an exhaustive and unique set of bank distress events, and model bank distress as a function of accounting-based fundamentals, while controlling for country-year fixed effects, and the type of resolution in the distressed entity. The analysis of our bank distress models reveals a substantial cross-country variation in the ability of accounting fundamentals to discriminate between distressed and non-distressed banks within countries. We examine the extent to which the variation in informativeness and accuracy of accounting fundamentals is explained by proxies of country-specific bank disclosure requirements and the enforcement thereof. We show that the association between accounting fundamentals and bank distress is attenuated in jurisdictions with relatively lax bank disclosure laws and their implementation. Accounting ratios, whose information value is the most sensitive to the quality of regulatory disclosure include regulatory capital ratios, loan loss provisions, and unreserved loan losses. The evidence in this paper supports the oft-voiced concern that excessive flexibility in financial reporting undermines the ability of accounting signals to accurately capture the underlying financial health of banks. Obliqueness of the distressed bank’s accounting signals makes such information less useful for investors and regulators, and thus has negative regulatory implications.

Valuation differences between quoted and unquoted companies- empirical evidence from the UK

This paper focuses upon differences in the valuation of UK quoted and unquoted companies. It draws on empirical evidence over the period from 1991 to 1997. It commences with an overview of the published literature. This suggests a broad spectrum of valuation statistics ranging from very minor discounts for non-listed companies relative to their quoted brethren, up to a discount as high as 40%. The empirical analysis uses PE ratios, derived from the publication Acquisitions Monthly, in respect of non-listed, private companies selling out in takeover deals. These are compared with average PE ratios for quoted companies in Britain. A raw statistic of approximately 40% was found as the discount for non-listed firms relative to quoted companies. However, this is dramatically different when corrected for size. For size varying from less than GBP 0.5 million to about GBP 55 million, the discount ranges, respectively, from 16% to 6% with an average of around 10%. Regression equations relating size and PE ratio are presented.

Implied Growth Horizons and the Cost of Equity

We introduce a straightforward method to estimate the implied cost of equity, allowing growth horizons to fluctuate both cross-sectionally and through time. Our results show substantial dispersion of implied growth horizons in cross-sections and time-series for US firms in the years 1988-2013. The cross-sectional difference in our implied cost of equity is a predictor of relative future returns. The return of an investment strategy based on the implied cost of equity improves, when expected growth horizons are allowed to fluctuate through time. Our findings suggest that valuation models using fixed growth horizons can be improved by the use of implied growth horizons.