When Do I Take Which Distribution?

Wehrspohn, Uwe; Ernst, Dietmar

doi:10.1007/978-3-031-07330-4

Cited by 3 publications

(3 citation statements)

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“…Selection and adaption of suitable distribution functions for the identified risks (uniform or triangular distribution, Gaussian-type distribution, etc. ); see (Wehrspohn and Ernst 2022); 3.…”

Section: Simulation-based Corporate Planningmentioning

confidence: 99%

“…In the first step, as a result of a risk workshop, the risks that have not been hedged or cannot be hedged by the company are identified. These risks are quantified by assigning them a distribution function (Wehrspohn and Ernst 2022). Table 1 presents an example of two identified risks with their distribution functions, namely sales growth and the cost of goods sold.…”

Section: Model and Datamentioning

confidence: 99%

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Tail Risks in Corporate Finance: Simulation-Based Analyses of Extreme Values

Börner,

Ernst,

Hoffmann

2023

JRFM

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Recently, simulation-based methods for assessing company-specific risks have become increasingly popular in corporate finance. This is because modern capital market theory, with its assumptions of perfect and complete capital markets, cannot satisfactorily explain the risk situation in companies and its effects on entrepreneurial success. Through simulation, the individual risks of a company can be aggregated, and the risk effect on a target variable can be shown. The aim of this article is to investigate which statistical methods can best assess tail risks in the overall distribution of the target variables. By doing so, the article investigates whether extreme value theory is suitable to model tail risks in a business plan independent of company-specific data. For this purpose, the simulated cash flows of a medium-sized company are analyzed. Different statistical ratios, statistical tests, calibrations, and extreme value theory are applied. The findings indicate that the overall distribution of the simulated cash flows can be multimodal. In the example studied, the potential loss side of the cash flow exhibits a superimposed, well-delimitable second distribution. This tail distribution is extensively analyzed through calibration and the application of extreme value theory. Using the example studied, it is shown that similar tail risk distributions can be modeled both by calibrating the simulation data in the tail and by using extreme value theory to describe it. This creates the possibility of working with tail risks even if only a few planning data are available. Thus, this approach contributes to systematically combining risk management and corporate finance and significantly improving corporate risk management. Based on these findings, further analyses can be performed in terms of risk coverage potential and rating to improve the risk situation in a company.

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Section: Simulation-based Corporate Planningmentioning

confidence: 99%

Section: Model and Datamentioning

confidence: 99%

Tail Risks in Corporate Finance: Simulation-Based Analyses of Extreme Values

Börner,

Ernst,

Hoffmann

2023

JRFM

Self Cite

View full text Add to dashboard Cite

show abstract

“…In step 1, as a result of a risk workshop, the risks that have not been hedged or can be hedged by the company are identified. These are quantified by assigning them a distribution function (Ernst and Wehrspohn 2022). Figure 1 shows the distribution functions for modelling total sales, COGS, and general administrative expenses.…”

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confidence: 99%

Simulation-Based Business Valuation: Methodical Implementation in the Valuation Practice

Ernst

2022

JRFM

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The simulation-based company valuation values a company on the basis of the risks actually present in the company without having to derive them from the capital market data. The simulation-based company valuation takes into account the market imperfections, such as the probability of insolvency or the lack of diversification, and fulfils the legal requirements and auditing standards for a company valuation. The simulation-based company valuation is an alternative to the CAPM-based company valuation, which, under the assumption of perfect capital markets, derives the risks through capital market comparisons. A simulation-based business valuation has many advantages and is particularly suitable for valuing medium-sized companies, start-ups, companies in a crisis, and for integrating country-specific risks into business valuations. Due to the internationally widespread use of the CAPM, a simulation-based company valuation is still rarely used in practice. This article shows which valuation formulas are necessary for the application of a simulation-based company valuation. These are used for both the certainty equivalent method and for the risk premium method. In a concrete and valuation example, the simulation-based business planning and company valuation is carried out, and the derived valuation formulas are applied in a way that allows a transfer to concrete valuation cases in practice. It is shown that the certainty equivalent method and the risk premium method lead to identical company values.

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Risk Measures in Simulation-Based Business Valuation: Classification of Risk Measures in Risk Axiom Systems and Application in Valuation Practice

Ernst

2023

Risks

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Simulation-based company valuations are based on an analysis of the risks in the company to be valued. This means that risk analysis is decisively important in a simulation-based business valuation. The link between risk measures, risk conception and risk axiom systems has not yet been sufficiently elaborated for simulation-based business valuations. The aim of this study was to determine which understanding of risk underlies simulation-based business valuations and how this can be implemented via suitable risk measures in simulation-based business valuations. The contribution of this study is providing guidance for the methodologically correct selection of appropriate risk measures. This will help with avoiding valuation errors. To this end, the findings were combined from risk axiom systems with the valuation equations of simulation-based business valuations. Only position-invariant risk measures are suitable for simulation-based business valuations.

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When Do I Take Which Distribution?

Cited by 3 publications

References 0 publications

Tail Risks in Corporate Finance: Simulation-Based Analyses of Extreme Values

Tail Risks in Corporate Finance: Simulation-Based Analyses of Extreme Values

Simulation-Based Business Valuation: Methodical Implementation in the Valuation Practice

Risk Measures in Simulation-Based Business Valuation: Classification of Risk Measures in Risk Axiom Systems and Application in Valuation Practice

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