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We examine the post-acquisition operating performance of

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This paper measures the effects on stock prices of corporate Investments In 5% or more of another company's equity securities. Such investments Initiate a process that may end with a takeover, targeted repurchase, takeover by a third party, or sale of the shares. The total valuation effect of the investment for acquiring and target firms Includes returns at disclosure of the investment position, the outcome announcement, and related intervening events. For example, the positive return for target firms at initial disclosure of the investment more than offsets the negative return at the targeted repurchase .-1-1.

This article compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios. THIS ARTICLE COMPARES THE market value of management buyouts and leveragedrecapitalizations to the discounted value of their corresponding cash flow forecasts. Most economists readily accept the concept of estimating market values by calculating the discounted value of the relevant cash flows. However, little empirical evidence exists that shows that discounted cash flows provide a reliable estimate of market value. This study provides evidence of a strong relation between the market value of the highly leveraged transactions (HLTs) in our sample and the discounted value of their corresponding cash flow forecasts.Our tests compare the transaction values in HLTs to estimates of the present value of the relevant cash flows. We use a sample of management buyouts and leveraged recapitalizations because these transactions typically release the cash flow information and transaction value required for the analysis. We use the cash flow forecasts to estimate the cash flows that will accrue to all capital providers, including different classes of debt and equity. The Journal of FinanceWe estimate a terminal value when the cash flow information ends. We value the capital cash flows and the terminal value using a discount rate based on the Capital Asset Pricing Model (CAPM). The resulting median estimates of discounted cash flows are within 10 percent of the HLT transaction values. Furthermore, the prediction errors of the discounted cash flow estimates (relative to transaction values) are qualitatively similar to those found in previous work for option pricing models (relative to call option prices).We compare the performance of our discounted cash flow estimates to that of estimates obtained from alternative valuation approaches that rely on companies in similar industries and companies involved in similar transactions. Such alternative valuation approaches-known as comparable or multiple approaches-are commonly used in practice. The discounted cash flow (DCF) methods, individually, perform at least as well as the comparable methods. However, we also find the comparable approaches to be useful, especially when combined with a discounted cash flow valuation.The discounted cash flow methods we use generally parallel the basic techniques taught in most business schools. Our results suggest that those techniques are both useful and reliable. We stress that our valuations rely...

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

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