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This study develops a model for estimating an index measure of asset specificity based on the liquidation value of corporate firms and the proportional distribution of their pre‐liquidation assets. A statistically significant positive relationship was found to exist between the estimated specificity index and financial leverage supporting the theoretical prediction. Additional evidence was found that firms with higher variability in sales, lower probabilities of failure, higher valued non‐debt tax shields and higher levels of financial slack use less financial leverage.

This paper aims to develop hedging strategies using both futures and forward contracts and issuing risky debt when financially constrained firms are forced to operate in long horizon.

The authors present a model for developing hedging strategies using both futures and forward contracts and issuing risky debt. A theoretical model employing stochastic differential equations for forward hedging is illustrated with a numerical example over parameter values consistent with the literature.

A financially constrained firm with limited cash balance must hedge its liquidity with both future and forward contracts and issue risky debt to support its long-term operations. The firm can issue a minimal amount of risky debt by adding forward contracts into hedging and can increase its value higher than that when hedging with only futures contracts. We show numerically that hedging with both futures and forward contracts allows the firm to issue minimal risky debt in increasing its firm value.

When Metallgesellschaft nearly collapsed in 1993, it offered long-term forward contracts to its customers and attempted to hedge its risk by rolling over series of short-term futures contract. It created the situation of inherent mismatch in maturity structure. A financially constrained firm operating in a long horizon appears to commit its liquidity as long-term forward contracts, which cannot be fully hedged with series of futures contacts. The firm should hedge its liquidity with both futures and forward contracts and avoid liquidation with deadweight costs in its long-term operation.

This is the first study examining hedging strategies with both futures and forward contracts.

This paper aims to illustrate the viability of distressed mergers and acquisitions (M&A) by way of case study utilizing the modern Graham and Dodd valuation approach.

The paper presents a distressed acquisition case study of the 1996 Marvel Entertainment Group (Marvel) bankruptcy. It draws on previously published Graham and Dodd methodological materials as well as a financial case study of Marvel that was prepared at the time. The valuation presented in this paper is the sole work of the author.

The case study supports the view that distressed M&A can be a viable corporate strategy alternative. It also demonstrates how a multi‐layered valuation approach such as Graham and Dodd can be ideal for identifying value that may be hidden in the confusion and distress of bankruptcy.

The case study illustrates the valuation insights that the modern Graham and Dodd approach can produce in a distressed setting.

The case study illustrates the viability of distressed M&A as a corporate strategy alternative.

This is the first paper that we are aware that applies Graham and Dodd‐based distressed M&A valuation to corporate strategy.

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer.

AISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return.

PV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent.

PV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models.

This paper provides guidelines for properly constructing PV models consistent with AISs.

PV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis.

This is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.

Business rescue, as a mechanism to aid financially distressed companies in South Africa, has received considerable academic and practical recognition. However, the business rescue plan is an overlooked and, perhaps, underdeveloped aspect of the regime. For stakeholders, this is the ultimate decision-making document. Creditors are the most influential stakeholders in business rescue proceedings owing to their voting rights. For creditors to make informed decisions and exercise their votes meaningfully, the business rescue plan should be transparent and adequately disclose relevant and reliable information. This study aims to identify creditors’ primary information needs to enhance the sufficiency and decision-usefulness of business rescue plans, not only to entice the vote of creditors but to enforce accountability from practitioners.

Using a qualitative research design, semi-structured interviews were conducted with 14 executives from 10 South African financial institutions.

The findings reveal that comprehensive disclosure of financial, commercial and legal information in business rescue plans was a critical antecedent for stakeholder decision-making. Additionally, leadership and social impact information were influential determinants. This study advances academic knowledge and, for practitioners, adds value to the development of business rescue plans. This can enhance creditors' confidence in supporting the rescue effort and approving the plan.

This study advances academic knowledge and, for practitioners, adds value to the development of business rescue plans. This can enhance creditors' confidence in supporting the rescue effort and approving the plan.

The originality of this article lies in its investigation of how creditors assess the information in BR plans as a precursor to supporting the company’s reorganisation in a creditor-friendly business rescue system such as South Africa. This study provides novel insights into the decision-making process, particularly how creditors assess BR plans, address information asymmetry and vote on the plan.

In January 1996, an investment manager of a hedge fund is considering purchasing an equity interest in a start-up biotechnology firm, Rocky Mountain Advanced Genome (RMAG). The asking price is $46 million for a 90% equity interest. Although managers of the firm are optimistic about its future performance, the investment manager is more conservative in her expectations. She asks an analyst to fashion a counterproposal for RMAG's management. The tasks for the student are to apply the concept of terminal value, interpret completed analyses and data, and derive implications of different terminal value assumptions in an effort to recommend a counterproposal. Little computation is required of the student. The main objective of the case is to survey many conceptual and practical challenges associated with estimating a firm's terminal value. Issues addressed include the concept of terminal value; the materiality of the terminal-value assumption; the varieties of terminal-value estimators and their strengths and weaknesses; taxation of terminal values; when to assume liquidation versus going-concern terminal values; choosing a forecast horizon at which to estimate a terminal value; the constant growth valuation model, its derivation, limiting assumptions of constant growth to infinity, and WACC > g; use of the Fisher Formula as a foundation for estimating growth rate to infinity; and using a variety of estimates to “triangulate” in on a terminal value.

Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main determinants of capital structure choice for real estate companies and in order to verify if they are related to factors similar to those affecting the decisions of public firms in other sectors.

Using a methodology similar to Rajan and Zingales, a sample of 119 listed REITs with different investment strategies and in different property sectors was analyzed. The analysis is carried out in order to determine the basic factors underpinning the capital structures by selecting financial items and ratios related with leverage (such as asset size, profitability ratios, tangibility of assets, growth opportunities, operating risk and geographical diversification of investments).

Results show that REITs follow a pecking order theory of financing since more profitable firms are less levered and REITs with more growth opportunities have higher leverage ratios. The tangibility of assets turns out to be positively correlated with leverage, while REITs whose operating risk is high prefer a lower financial risk and consequently a lower gearing. Finally, it is not clear how size affects leverage decisions and more diversified REITs appear to be riskier.

The research also addresses the issue of asymmetric information and the debt‐equity choice for REITs sampled on the basis of their size, highlighting differences with other business sectors.

The restructuring of shipping and shipbuilding companies in the midst of rapidly shrinking global shipping demand has become a prominent issue in Korea. In shipping finance, loan syndication featuring many creditors surges as the preferred option. However, increasing the numbers of creditors in the syndicate results in two opposite effects. First is the beneficial effect from their enhanced monitoring power. On the other hand, there is the adverse effect resulting from increased difficulty in coordination when syndicate members increase, particularly in bankruptcy. Our aim of this paper is to analyze the role of finance in the shipping and shipbuilder markets, and determine the theoretical optimal number of creditors for the shipping finance syndicate based on Bolton and Scharfstein (1996). The two issues above result from moral hazard and non-verifiability: coordination among many creditors for collection of bonds in case of default, and the enhancement of monitoring private benefit exploitation by the ship-owner during default. Considering the two conflicting forces result from an increase in creditor membership, we draw conclusions on determining the optimal number of creditors by considering trade-offs between these two factors: More creditors are preferred when the monitoring effect dominates. Otherwise, less creditors are preferred.

The purpose of this paper is to describe the wealth expropriation from minority to majority shareholders due to the lack of legislation protecting the interests of minority shareholders in an acquisition deal, validating the claims made on studies made by Zingales and by La Porta et al.

Despite an overall takeover premium of nearly 250 percent, most minority shareholders actually suffered wealth losses ranging from US$ 7.1 to 31.14 millions. These losses are measured using different methodologies, such as accounting value; liquidation value; and economic value.

The Campos Chilenos case study presented here serves as a testing platform for the relationship between well‐developed legal systems and economic development in both a current and future sense. In a current sense, the case illustrates how inadequate minority shareholder protection led to minority shareholder wealth expropriation, discouraging minority investment from both domestic and foreign investors (and limiting economic development).

Future implications lay in the corporate governance regulation reforms passed in the aftermath of the Campos Chilenos case. If the Chilean government actively enforces new regulations, the level of economic development in Chile will exceed that of its peers in Latin America and other emerging economies, as claimed by La Porta et al.

This study will be useful for governance makers and regulators in emerging countries.