IDEAS home Printed from https://ideas.repec.org/a/mth/raee88/v7y2015i1p26-47.html
   My bibliography  Save this article

Continuity or Liquidation in Situations of Ambiguity: Fuzzy Binomial Model to Valuate Leveraged Firms

Author

Listed:
  • Gast¨®n S. Milanesi

    (Business Administration Department, Universidad Nacional del Sur., San Andr¨¦s 800, Campus Altos de Palihue, Depto Ciencias de la Administraci¨®n, UNS, Bah¨ªa Blanca (8000), Provincia de Buenos Aires, Argentina)

  • Emilio El Alabi

    (Business Administration Department, Universidad Nacional del Sur., San Andr¨¦s 800, Campus Altos de Palihue, Depto Ciencias de la Administraci¨®n, UNS, Bah¨ªa Blanca (8000), Provincia de Buenos Aires, Argentina)

  • Gabriela Pesce

    (Business Administration Department, Universidad Nacional del Sur., San Andr¨¦s 800, Campus Altos de Palihue, Depto Ciencias de la Administraci¨®n, UNS, Bah¨ªa Blanca (8000), Provincia de Buenos Aires, Argentina)

Abstract

This paper proposes a fuzzy binomial valuation model to estimate leveraged firm value while conditioning its continuity or liquidation in cash flow generation after taxes to attend debt payments. It includes two triangular fuzzy variables. Thus, we incorporate ambiguity in the firm valuation process characterized by uncertainty in projections of both growth and financial costs. Our proposed model is presented, developed, and exemplified through a case which results complement both the DCF (under the adjusted present value) and the traditional real option binomial method. This occurs because, in one hand, DCF method assumes decisions¡¯ irreversibility and operating firms¡¯ situation. On the other hand, traditional binomial model weakens previous restrictions but does not incorporate ambiguous variables in the analysis. Hence, fuzzy logic applied to option models allows us to complement probabilistic valuation approach working on a frame of possibilities.

Suggested Citation

  • Gast¨®n S. Milanesi & Emilio El Alabi & Gabriela Pesce, 2015. "Continuity or Liquidation in Situations of Ambiguity: Fuzzy Binomial Model to Valuate Leveraged Firms," Research in Applied Economics, Macrothink Institute, vol. 7(1), pages 26-47, March.
  • Handle: RePEc:mth:raee88:v:7:y:2015:i:1:p:26-47
    as

    Download full text from publisher

    File URL: http://www.macrothink.org/journal/index.php/rae/article/view/6578/6069
    Download Restriction: no

    File URL: http://www.macrothink.org/journal/index.php/rae/article/view/6578
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    2. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    3. Broadie, Mark & Kaya, Özgür, 2007. "A Binomial Lattice Method for Pricing Corporate Debt and Modeling Chapter 11 Proceedings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(2), pages 279-312, June.
    4. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
    5. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    7. Milanesi, Gastón, 2014. "Modelo binomial para la valoración de empresas y los efectos de la deuda: escudo fiscal y liquidación de la firma," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 19(36), pages 2-10.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cardone Riportella, Clara & Casasola, María José, 2003. "What do we know about the financial behaviour of the Spanish SME?: an empirical analysis," DEE - Working Papers. Business Economics. WB wb033708, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    2. Hu, Qiwei & Zhang, Anming, 2015. "Real option analysis of aircraft acquisition: A case study," Journal of Air Transport Management, Elsevier, vol. 46(C), pages 19-29.
    3. Demirguc-Kunt, Asli, 1992. "Developing country capital structures and emerging stock markets," Policy Research Working Paper Series 933, The World Bank.
    4. Bettis, J. Carr & Bizjak, John & Coles, Jeffrey L. & Kalpathy, Swaminathan, 2018. "Performance-vesting provisions in executive compensation," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 194-221.
    5. Jianjun Miao, 2005. "Optimal Capital Structure and Industry Dynamics," Journal of Finance, American Finance Association, vol. 60(6), pages 2621-2659, December.
    6. Jobst, Andreas A., 2014. "Measuring systemic risk-adjusted liquidity (SRL)—A model approach," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 270-287.
    7. Christian Toll & Jan-Phillipp Rolinck, 2017. "Earn-outs to bridge gap between negotiation parties – curse or blessing?," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 18(1), pages 103-116.
    8. Peter Christoffersen & Redouane Elkamhi & Bruno Feunou & Kris Jacobs, 2010. "Option Valuation with Conditional Heteroskedasticity and Nonnormality," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 2139-2183.
    9. Arkadiy V. Sakhartov & Timothy B. Folta, 2014. "Resource relatedness, redeployability, and firm value," Strategic Management Journal, Wiley Blackwell, vol. 35(12), pages 1781-1797, December.
    10. Vasiliou, Dimitrios & Daskalakis, Nikolaos, 2009. "Institutional characteristics and capital structure: A cross-national comparison," Global Finance Journal, Elsevier, vol. 19(3), pages 286-306.
    11. Fulghieri, P. & Nagarajan, S., 1996. "On the strategic role of high leverage in entry deterrence," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 1-23, January.
    12. Matthias Fahn & Valeria Merlo & Georg Wamser, 2019. "The Commitment Role of Equity Financing," Journal of the European Economic Association, European Economic Association, vol. 17(4), pages 1232-1260.
    13. Poitevin, Michel, 1989. "Information et marchés financiers : une revue de littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 65(4), pages 555-589, décembre.
    14. Jack Clark Francis & Arie Harel & Giora Harpaz, 2010. "Actuarially Fair Premia for Deductible Insurance Policies," The American Economist, Sage Publications, vol. 55(2), pages 83-91, November.
    15. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    16. Arping, Stefan, 2005. "Protective interests and creative destruction," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 401-431, October.
    17. Veld, C.H. & Verboven, A.H.F., 1993. "An empirical analysis of warrant prices versus long term call option prices," Research Memorandum FEW 594, Tilburg University, School of Economics and Management.
    18. Sven Husmann & Andreas Stephan, 2007. "On estimating an asset's implicit beta," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(10), pages 961-979, October.
    19. Luigi Zingales, 2000. "In Search of New Foundations," Journal of Finance, American Finance Association, vol. 55(4), pages 1623-1653, August.
    20. Mondher Bellalah, 2009. "Derivatives, Risk Management & Value," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7175.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mth:raee88:v:7:y:2015:i:1:p:26-47. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Technical Support Office The email address of this maintainer does not seem to be valid anymore. Please ask Technical Support Office to update the entry or send us the correct address (email available below). General contact details of provider: http://www.macrothink.org/journal/index.php/rae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.