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Valuation of Bankrupt Firms

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  • Gilson, Stuart C
  • Hotchkiss, Edith S
  • Ruback, Richard S

Abstract

This study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management's published cash flow projections. We estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value. We find that these methods generally yield unbiased estimates of value, but the dispersion of valuation errors is very wide--the sample ratio of estimated value to market value varies from less than 20% to greater than 250%. Cross-sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders' incentives to overstate or understate the firm's value. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Gilson, Stuart C & Hotchkiss, Edith S & Ruback, Richard S, 2000. "Valuation of Bankrupt Firms," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 43-74.
  • Handle: RePEc:oup:rfinst:v:13:y:2000:i:1:p:43-74
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    Cited by:

    1. Ingolf Dittmann & Christian Weiner, 2005. "Selecting Comparables for the Valuation of European Firms," SFB 649 Discussion Papers SFB649DP2005-002, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Beck, Thorsten & Laeven, Luc, 2006. "Resolution of failed banks by deposit insurers : cross-country evidence," Policy Research Working Paper Series 3920, The World Bank.
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    4. Barbara Fidanza, 2008. "The Valuation by Multiples of Italian Firms," Working Papers 14-2008, Macerata University, Department of Studies on Economic Development (DiSSE), revised Nov 2008.
    5. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Dividend Policy inside the Firm," NBER Working Papers 8698, National Bureau of Economic Research, Inc.
    6. Feldhütter, Peter & Hotchkiss, Edith & Karakaş, Oğuzhan, 2016. "The value of creditor control in corporate bonds," Journal of Financial Economics, Elsevier, vol. 121(1), pages 1-27.
    7. Frank, Murray Z. & Shen, Tao, 2016. "Investment and the weighted average cost of capital," Journal of Financial Economics, Elsevier, vol. 119(2), pages 300-315.
    8. Thanida Chitnomrath & Robert Evans & Theo Christopher, 2011. "Corporate governance and post-bankruptcy reorganisation performance: Evidence from Thailand," Asian Review of Accounting, Emerald Group Publishing, vol. 19(1), pages 50-67, May.
    9. Michael Falkenheim & George Pennacchi, 2003. "The Cost of Deposit Insurance for Privately Held Banks: A Market Comparable Approach," Journal of Financial Services Research, Springer;Western Finance Association, pages 121-148.
    10. Eberhart, Allan C., 2001. "Comparable firms and the precision of equity valuations," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1367-1400, July.
    11. Chatterjee, Sris & Dhillon, Upinder S. & Ramirez, Gabriel G., 2004. "Debtor-in-possession financing," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3097-3111, December.
    12. Officer, Micah S., 2007. "The price of corporate liquidity: Acquisition discounts for unlisted targets," Journal of Financial Economics, Elsevier, vol. 83(3), pages 571-598, March.
    13. Helwege, Jean & Packer, Frank, 2003. "Determinants of the choice of bankruptcy procedure in Japan," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 96-120, January.
    14. Kenton Yee, 2008. "A Bayesian framework for combining valuation estimates," Review of Quantitative Finance and Accounting, Springer, vol. 30(3), pages 339-354, April.
    15. Eberhart, Allan C., 2005. "A comparison of Merton's option pricing model of corporate debt valuation to the use of book values," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 401-426, March.
    16. Pavla Maříková, 2007. "Comparison of US Bankrupt Firms Values Derived from Reorganization Plans with Values Achieved on Capital Markets," Český finanční a účetní časopis, University of Economics, Prague, vol. 2007(1), pages 65-69.
    17. Chen, Hong-Yi & Lee, Cheng-Few & Shih, Wei K., 2016. "Technical, fundamental, and combined information for separating winners from losers," Pacific-Basin Finance Journal, Elsevier, pages 224-242.
    18. Roman Čibera & Tomáš Krabec, 2016. "Behavioral Finance and Asset Valuation in Insolvency Proceedings," Ekonomika a Management, University of Economics, Prague, vol. 2016(1).
    19. Juhász Jácint & Kovács Imola & Kovács Ildikó, 2010. "Comparable Valuation Method - A New Approach. Case Study: A Romanian Flexographic Printing Firm," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 571-577, December.
    20. Roosenboom, Peter, 2012. "Valuing and pricing IPOs," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1653-1664.
    21. Georgia Pazarzi, 2014. "Comparison of the Residual Income and the Pricing - Multiples Equity Valuation Models," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 88-114.
    22. Houston, Joel F. & James, Christopher M. & Ryngaert, Michael D., 2001. "Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 285-331, May.
    23. Hotchkiss, Edith S. & Mooradian, Robert M., 2003. "Auctions in bankruptcy," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 555-574, November.
    24. Ismail, Ahmad & Krause, Andreas, 2010. "Determinants of the method of payment in mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 471-484, November.

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