Valuation Disputes in Corporate Bankruptcy

32 Pages Posted: 21 May 2018 Last revised: 14 Oct 2019

See all articles by Kenneth Ayotte

Kenneth Ayotte

University of California, Berkeley - School of Law

Edward R. Morrison

Columbia Law School

Date Written: January 19, 2018

Abstract

Prior scholarship points to valuation disputes and valuation error as key drivers of Chapter 11 outcomes. Avoiding valuation disputes and errors is also the underlying driver of most proposed reforms, from Baird’s auctions to Bebchuk’s options. In this paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. Our paper has two goals. The first is to understand how parties and their expert witnesses justify their opposing views to judges, and how judges decide between them. The second is to provide practical guidance to judges in resolving valuation disputes. We document surprisingly pervasive (and often self-serving) errors in expert testimony. This is particularly true when valuation experts apply the discounted cash flow (DCF) method. With respect to key elements of that method, such as the discount rate, we observe stark inconsistency between expert testimony and finance theory and evidence. We propose simple strategies based in finance theory that judges can employ (such as avoiding the use of company-specific risk premia in discount rates) to reduce the scope for valuation disagreements in Chapter 11. We also recommend that judges rely on the peer-reviewed finance and economics literature to assess the scientific reliability of discount rates.

Keywords: Corporate Reorganization, Bankruptcy, Valuation, DCF, Multiples, Discount Rate, Expert Witnesses

JEL Classification: K22, G32, G33

Suggested Citation

Ayotte, Kenneth and Morrison, Edward R., Valuation Disputes in Corporate Bankruptcy (January 19, 2018). University of Pennsylvania Law Review, Forthcoming; Columbia Law and Economics Working Paper; UC Berkeley Public Law Research Paper. Available at SSRN: https://ssrn.com/abstract=3176182

Kenneth Ayotte

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Edward R. Morrison (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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