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Steven N. Kaplan, Richard S. Ruback
NBER Working Paper No. 4724*
Issued in April 1994
NBER Program(s): CF
---- 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.
*Published: Journal of Finance, volume 50, Sept 1995, pp1059-1094.
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