Book Values and Market Values of Equity and Debt

Marco Realdon

Discussion Papers from Department of Economics, University of York

Abstract: This paper propses a contingent claims model to value a firm's debt and equity as functions of observable book values appearing in published financial statements. Equity fair value critically depends on expected earnings, equity book value and earnings volatility, because of the options to default or to voluntarily liquidate the firms. Debt value increases in earnings volability in the proximity of default. Default is triggered by the erosion of equity due to negative earnings. Debt and equity values are materially affected by the strength of the mean reversion of profitability. Voluntary liquidation before default may be optimal and it entails that a sudden sharp decline in profitability can be less detrimental to creditors than a slower but persistent one.

Keywords: Book values; mean reverting return on assets; equity valuation; debt valuation; default option; structural models; voluntary liquidation. (search for similar items in EconPapers)
JEL-codes: G13 G33 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.york.ac.uk/media/economics/documents/discussionpapers/2006/0611.pdf Main text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:06/11

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().