Valuation with mixed financing strategies
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Valuation with mixed financing strategies Stefan Dierkes1
•
Imke de Maeyer1
Received: 6 January 2020 / Accepted: 26 September 2020 Ó The Author(s) 2020
Abstract In corporate valuation, it is common to assume either passive or active debt management. However, it is questionable whether these pure financing policies reflect the real financing policies of firms with a sufficient degree of accuracy. This shortcoming has led to the development of mixed financing strategies as combinations of pure financing strategies. Whereas hybrid financing is directly linked to the two-phase model, it is unclear how to apply discontinuous financing in such a setting. In this study, according to the two versions of hybrid financing, we analyze the implementation of discontinuous financing in a two-phase model. Thereby, we present a simpler and more intuitive derivation of the valuation equation for discontinuous financing to increase its acceptance and its use for corporate valuation practice. Moreover, we compare the different mixed financing strategies with each other theoretically, and we conduct simulations to elucidate the impact on market values and the sensitivities of input parameters. The study concludes that the presented mixed financing strategies can help in the attempt to reflect the real financing behavior of firms more accurately and, therefore, constitute a valuable alternative to pure financing strategies for valuation. Keywords Valuation Financing strategy Mixed financing strategy Hybrid financing Discontinuous financing Two-phase model JEL Classification G12 G32
& Stefan Dierkes [email protected] Imke de Maeyer [email protected] 1
Finance and Control, Georg-August-University-Go¨ttingen, Platz der Go¨ttinger Sieben 3, 37073 Go¨ttingen, Germany
123
Business Research
1 Introduction Corporate valuation with discounted cash flow approaches requires assumptions about the firm’s financing strategy. Since interest on debt is deductible from taxable income, the financing strategy has an immediate influence on the market value of the firm. In this regard, it is generally assumed that a consistent financing strategy is pursued in each period of the forecast horizon. However, empirical findings show that it is questionable whether pure financing strategies like active or passive debt management reflect the real financing policies of firms with a sufficient degree of accuracy (see, e.g. Lewellen and Emery 1986; Barclay and Smith 2005; Grinblatt and Liu 2008). Therefore, it is promising to consider a two-phase model that differentiates between financing policies in the explicit forecast and the steady-state phase. The interaction between passive debt management in the explicit forecast phase and active debt management in the steady-state phase has already been examined as hybrid financing (Kruschwitz et al. 2007; Dierkes and Gro¨ger 2010). Furthermore, discontinuous financing as another mix of active and passive debt management was developed (Clubb and Doran 1995; Arnold et
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