nep-cfn New Economics Papers
on Corporate Finance
Issue of 2009‒08‒08
two papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Decomposition of a Certain Cash Flow Stream: Systemic Value Added and Net Final Value By Carlo Alberto Magni
  2. Cash, access to credit, and value creation in M&As By José Manuel Campa; Ignacio Hernando

  1. By: Carlo Alberto Magni
    Abstract: This paper proposes a method for evaluating a project under certainty by means of a systemic outlook, which borrows from accounting the way of representing economic facts while replacing accounting values with cash values. The investor's net worth is regarded as a system whose structure changes over time. On this basis, a profitability index is presented, here named Systemic Value Added (SVA), which lends itself to a periodic decomposition. While as an overall index the Systemic Value Added coincides with the Net Final Value (NFV) of an investment, the systemic partition of a SVA is shown to differ from the Net Present Value (NPV) decomposition model proposed by Peccati (1987, 1992), which in turn bears a strong resemblance to Stewart's (1991) EVA model. The different assumptions the three models rely on are analysed: Some inconsistencies arise in the NFV-based approach, which give rise to Peccati's and Stewart's model, but they can be healed (only in a certain sense) by re-shaping the model and taking account of the systemic approach. To this end, the introduction of a shadow project is needed which enables us to avoid compounding. An interesting result is that we can decompose the SVA of a project by applying Peccati's argument to its shadow, or which is the same, by computing the shadow project's Economic Value Added. The paper then generalizes the approach allowing for a portfolio of projects, multiple debts and multiple synchronic opportunity costs of capital, for which a tetra-dimensional decomposition is easily obtained.
    Date: 2009–08–02
  2. By: José Manuel Campa (IESE Business School); Ignacio Hernando (Banco de España)
    Abstract: The worldwide availability of easy external financing has been an essential driver of recent M&A activity and a growing perception exists that such conditions may have resulted in a large number of non-value increasing transactions. This paper evaluates the interaction between credit conditions, the method of payment and value creation in a sample of European M&A transactions. The contribution of the paper is twofold. First, we analyze to what extent more generous financing conditions lead to deals that were less-likely to be value creating. Second, we estimate a joint model on the likelihood of choosing cash as a method of payment and the amount of value-created by such deals, controlling for the impact of financial conditions. We find that lower corporate bond spreads are correlated with less value creation in M&A deals suggesting that easy financial conditions may have resulted in M&A deals less-likely to generate value. We also find that higher leverage and a better cash-flow position of the target are more likely to result in cash deals and these deals provide higher excess returns to targets although do not generate value for the deal.
    Keywords: Mergers and acquisitions, payment method, credit conditions
    JEL: G14 G32 G34
    Date: 2009–07

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