Investments as key entrepreneurial action: the case of financially distressed target companies

David J. Rapp () and Michael Olbrich
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David J. Rapp: IWP - Institut für Wirtschaftsprüfung (Universität des Saarlandes - Saarland University)
Michael Olbrich: IWP - Institut für Wirtschaftsprüfung (Universität des Saarlandes - Saarland University)

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Abstract: Recent entrepreneurship research characterizes investments as the very essence of entrepreneurship, supplanting the discovery or creation of opportunities. Merger & acquisition (M&A) activity must, therefore, be understood as a key entrepreneurial action. Corresponding M&A decisions require a reliable valuation beforehand. This is particularly true in the case of financially distressed target companies, since such transactions include a relatively high level of uncertainty. Especially in times of economic downturn, companies increasingly struggle with financial distress. The recent financial crisis and its far-reaching impacts can be characterized as a cause of companies' financial distress. For the valuation of such financially distressed companies, literature basically recommends the same methods used for the valuation of financially strong companies. As will be shown, the most popular valuation methods cause a profound dilemma when applied for the appraisement of financially distressed companies. Consequently, they need to be substituted by a consistent alternative avoiding their inherent contradictions. The aim of this paper, therefore, is to develop such an alternative method, which can be consistently applied for the entrepreneurial appraisement of financially distressed-or even bankrupt-companies.

Date: 2016-03-14
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Published in Frontiers of Small Business and Entrepreneurial Finance in a Global Environment- 2016, Mar 2016, Venise, Italy

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02326485

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