Working Paper: NBER ID: w4724
Authors: Steven N. Kaplan; Richard S. Ruback
Abstract: This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. These forecasts are provided by management to investors and shareholders in 51 HLTs completed between 1983 and 1989. Our estimates of discounted cash flows are within 10%, on average, of the market values of the completed transactions. Our estimates perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis and estimate the risk premium implied by transaction values and forecast cash flows, and the relation of the implied risk premium to firm-level betas, industry-level betas, firm size, and firm book-to-market ratios.
Keywords: cash flow forecasts; market value; highly leveraged transactions; discounted cash flow
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow forecasts (F37) | market value of HLTs (D46) |
| implied risk premium (G19) | market value of HLTs (D46) |
| implied risk premium (G19) | firm and industry betas (L20) |
| systematic risk measures (G12) | market value of HLTs (D46) |