Corporate Valuation: Analyzing the Theoretical Valuations of Stylized Corporates

23 Pages Posted: 11 May 2021

See all articles by Dilip B. Madan

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

King Wang

Morgan Stanley

Date Written: May 10, 2021

Abstract

Corporations are viewed as perpetual derivatives securities with cash flows defined by deterministic functions of state variables. In time homogeneous and Markovian contexts the valuation of corporate is given by a deterministic function of the state variables. The resulting value function solves an integro-differential equation with a boundary condition of zero at infinity. Solutions are illustrated in dimensions one, two and ten. It is observed that for positive and bounded cash flow functions the value functions cannot be linear. The attitude of a corporate to risk depends on the nonlinearity. In higher dimensions the corporate will typically be a risk taker in some directions and simultaneously a risk avoider in other directions. The valuation theory also leads to new asset pricing equations inferring asset variations from risk neutral covariations. The shift from mean returns and covariances is necessitated by the focus on instantaneous risk exposures represented by measures replacing probabilities.

Keywords: Multivariate Bilateral Gamma, Nonlinear Valuation, Gaussian Process Regression, Quantization

JEL Classification: G10, G11, G12.

Suggested Citation

Madan, Dilip B. and Wang, King, Corporate Valuation: Analyzing the Theoretical Valuations of Stylized Corporates (May 10, 2021). Available at SSRN: https://ssrn.com/abstract=3843378 or http://dx.doi.org/10.2139/ssrn.3843378

Dilip B. Madan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

King Wang

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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