A Comparables Approach to Measuring Cashflow-at-Risk for Non-Financial Firms

National Economic Research Associates Working Paper No. 39

27 Pages Posted: 23 Sep 2000

See all articles by Stephen E. Usher

Stephen E. Usher

NERA Economic Consulting

Daniel LaGattuta

Marsh & McLennan Companies - New York Office

Jeff Youngen

NERA Economic Consulting

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2000

Abstract

In this paper, we present the results of our efforts to develop an estimate of cashflow-at-risk--which we label C-FaR--for non-fiancial firms. C-FaR measures the risk of unforeseen shortfall in a company's operating cashflows over some horizon in the future, conditional on information available today; e.g., one can speak of quarter-ahead C-FaR, or year-ahead C-FaR. In contrast to the "bottom-up" approach used by financial institutions to estimate Value-at-Risk (VaR), our method approaches things from the "top down", looking directly at the ultimate item of interest, overall company cashflows. In order to have enough data to make meaningful statements for any given target company, we use a sophisticated benchmarking technique to identify its closest comparables. In particular, we search for the other companies in the Compustat universe that most closely resemble our target company on four dimensions: 1) market cap; 2) profitability; 3) industry risk; and 4) stock-price volatility. This comparables methodology allows us to estimate C-FaR probability distributions for any company using relatively large numbers of observations on cashflow shocks. Our results indicate substantial differences in cashflow riskiness for companies with different characteristics.

Suggested Citation

Usher, Stephen E. and LaGattuta, Daniel and Youngen, Jeff and Stein, Jeremy C., A Comparables Approach to Measuring Cashflow-at-Risk for Non-Financial Firms (August 2000). National Economic Research Associates Working Paper No. 39. Available at SSRN: https://ssrn.com/abstract=239810 or http://dx.doi.org/10.2139/ssrn.239810

Stephen E. Usher

NERA Economic Consulting ( email )

50 Main Street, 14th Floor
White Plains, NY 10606
United States

Daniel LaGattuta

Marsh & McLennan Companies - New York Office ( email )

1166 Avenue of the Americas, 34th Floor
New York, NY 10036
United States
212-345-5448 (Phone)
212-345-4650 (Fax)

Jeff Youngen

NERA Economic Consulting ( email )

50 Main Street, 14th Floor
White Plains, NY 10606
United States

Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

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