Distortion in corporate valuation: implications of capital structure changes
Abstract
Purpose
The traditional discounted cash flows (DCF) valuation procedure used by financial analysts assumes that firms maintain a policy of fixed debt. However, empirical evidence suggests that many firms rebalance their debt. This paper seeks to explore the implication of this discrepancy for valuation of firms that undergo a capital structure change.
Design/methodology/approach
The approach taken is both theoretical and empirical.
Findings
The authors show how the valuation process should be modified for firms that are expected to rebalance their debt and demonstrate the distortion in value that results if the traditional DCF valuation procedure is used instead. Furthermore, they illustrate the significance of their results using a sample of the largest largest leveraged buyouts of the current decade.
Originality/value
To the authors' knowledge, this is the first investigation into this issue.
Keywords
Citation
Oded, J., Michel, A. and Feinstein, S.P. (2011), "Distortion in corporate valuation: implications of capital structure changes", Managerial Finance, Vol. 37 No. 8, pp. 681-696. https://doi.org/10.1108/03074351111146175
Publisher
:Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited