The Evolution of Valuation in Bankruptcy
Michael Simkovic, The Evolution of Valuation in Bankruptcy, 91 Am. Bankr. L.J. 301 (2017)
8 Pages Posted: 19 Jul 2016 Last revised: 17 Sep 2017
Date Written: July 16, 2016
Financial analyses such as valuation, solvency and capital adequacy play a crucial role in bankruptcy. Over the course of the 20th century, methods of financial analysis in bankruptcy have shifted from earnings multiples to discounted cash flow (DCF) and recently to market-based approaches such as auctions, market pricing of equity and unsecured debt, and credit spreads. Each shift in bankruptcy court practice followed shifts in financial services industry practice and developments in academic finance. Bankruptcy courts shifted gradually, often several decades after the financial community. Newer methods encountered resistance and skepticism, and older methods continued to be used by courts in conjunction with newer methods for many years. The overall pattern reflects a movement toward greater financial and quantitative sophistication by bankruptcy courts and practitioners and seems to be driven by a desire for greater accuracy and objectivity.
Note: The final version of this article was published as: Michael Simkovic, The Evolution of Valuation in Bankruptcy, 91 Am. Bankr. L.J. 301 (2017).
Keywords: bankruptcy, 363 sale, reorganization, solvency, adequate capital, discounted cash flow, capitalization rate, multiples, comparable companies, comparable transactions, credit spread, probability of default, credit default swap, corporate bond, credit derivative, auction, VFB, Iridium, Tousa
JEL Classification: A12, B15, B16, B26, D81, G12, G13, G18, G33, G34, N21, N22
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