Contributions published at Corporate Finance Theory (Michel Habib)

Executive Summary This bachelor thesis provides an analysis and evaluation regarding company valuations of professional football clubs in Europe. The thesis also covers the different league regulations in England and Germany, which have impacts on team's financial conditions and business strategies. The UEFA's (Union of European Football Associations) influence on national teams and leagues has been examined as well. The football industry differs from other industry sectors in a lot of aspects. Firstly, intangibles such as player registrations or brand values account for the main part of total assets. Secondly, the club's typical management value sporting success more than financial goals, which often leads to overspendings and negative cash-flows and earnings. Finally, there are non-financial aspects such as global fan base and sporting success, which need to be considered in an appropriate club valuation. What common valuation methods can be applied or should be rather ignored, when it comes to the valuation of football corporations? The controversial point this thesis also tries to answer is, whether there exists an optimal valuation method considering all relevant aspects. The data basis include the study of football club's annual reports (in particular the financial state-ments), current newspaper articles, handbooks from football associations and branch-specific reports from professional business valuers. For the theoretical part, several other academic papers focusing on this specific subject and primary literature have been used. Methods of analysis include three different and common valuation approaches such as DCF (Discounted Cash Flows), trading multiples and intrinsic value method. Their advantages and disadvantages have been examined regarding applicability to football clubs. Due to simplicity and transparency reasons, the analysis has its focus on only 22 professional football teams of different sizes and on two national leagues. The analysis of the football league's general framework leads to the conclusion that a club's financial condition will be soon as significant as sporting objectives. Due to stricter regulations introduced by UEFA and national football associations, the management will be forced to adjust their investments (e.g. player trading and salaries) to revenues. Violations will be punished with point deductions or disqualification from competitions. Piling up huge debts in order to keep up with strong-selling competitors might be a thing of the past, provided that corresponding football associations will take the necessary actions as controllers and executors. As a consequence of new regulations, cheaper long-term investments in youth academies and infrastructure will be more attractive than short-term investments such as expensive and time-limited player registrations. Furthermore, the UEFA's introduction of FFP (Financial Fair Play) is an important step towards fairer conditions between all clubs in national and international competitions. By regulating the maximal allowed loss per season for international competitors, it will be more difficult for rich investors taking over and transforming middle-class clubs to big players by spending huge amounts of money (e.g. Chelsea or Manchester City). The analysis in terms of valuation methods leads to following results: In order to estimate a football club's value, the valuation with trading multiples based on market prices appears to be the best option. By considering branch-specific and non-financial multiples, the presented valuation generates significant and plausible results. Nevertheless, it still needs to be pointed out that even the author's best considered valuation method has its downsides. For one thing, all results depend on the estimation of market participants determining a club's market capitalization. Whether the football market has a semi-strong or strong market efficiency is rather doubtful. Another criticizable point is that the evaluator's subjective decisions regarding selection and weighting of reference values can have an impact on the final result. In comparison to the end results from Forbes' professionals, the top-rated clubs have a loss of value while the mid-sized and smaller clubs could benefit from the author's valuation method. The complexity while estimating sports clubs' values remains. Eventually, it need to be said that there will never be the correct and absolutely ideal method to estimate a firm's value. Similar to the fish market, there will always be a price range since potential buyers value the fish differently. We need to be cautious to make any conclusions regarding general financial conditions of specific football leagues, since only 2-4 teams per division and country have been examined. The results indicate that especially the Portuguese and Turkish teams have lived beyond their means, whereas the English and German clubs are well capitalized. Borussia Dortmund and FC Bayern Munich in particular are role models in football industry. Both have solid equity ratio ratios of above 60%, positive net income and achieve their sporting goals at the same time. It will be interesting to see, if the German Bundesliga can close the sporting gap to their Spanish and English rivalries in the UEFA league ranking. It might be too early to conclude the effect of stricter regulations in Germany, but the advantage is definitely on their side in the near future.

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We investigate the suitability of securitization as an alternative to reinsurance for the purpose of transferring natural catastrophe risk. We characterize the conditions under which one or the other form of risk transfer dominates using a setting in which reinsurers and traders in financial markets produce costly information about catastrophes. Such information is useful to insurers: along with the information produced by insurers themselves, it reduces insurers’ costly capital requirements. However, traderswho seek to benefit from trading in financial markets may produce ‘too much’ information,thereby making risk transfer through securitization prohibitively costly.

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We analyze the implications of the decision to spawn or to retain a new product for the nature and evolution of the firm. In our model, a new product is spawned if the fit between the product and its parent firm organization is not adequate. We focus on the impact of the firm’s history of spawning decisions on firm characteristics such as size, focus, profitability, and innovativeness, and analyze its role in shaping firm dynamics. In accordance with the empirical literature, our model predicts that older firms innovate less, spawn less, are more diversified and less profitable, and that firms with more valuable general or specialized resources innovate and spawn more. Echoing seemingly contradictory empirical findings, our model predicts that small, focused firms (large, diversified firms) innovate and spawn more, and are more profitable when sample heterogeneity is driven by the importance of organizational fit (the value of general resources).

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Traditional models of sovereign debt assume that governments seek to maximize the long terminterests of their countries.We assume instead that governments borrow and default according to their own political interests. In particular they often have limited horizons and are reluctant to default strategically. This allows us to define a maximum sustainable debt to GDP ratio, and compute it as a function of the countrys fundamentals. We find that maximum sustainable debt varies a lot across countries, consistent with the notion of country specific debt (in)tolerance. Actual debt ratios are below their maximum sustainable levels, as governments seeking further terms in office fear debt-induced default that may jeopardize their prospects for reelection. The difference between actual and maximum sustainable debt ratios creates a "margin of safety" that allows governments to increase debt if necessary with little corresponding increase in default risk. The probability of default climbs precipitously once the margin of safety has been exhausted.

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Abstract In September 2011, the Swiss National Bank [SNB] decided to set a minimum exchange rate between the Swiss franc and the euro. This intervention was a radical step to protect the Swiss economy against an uncontrollable appreciation of the Swiss franc. However, the setting of the minimum exchange rate also changed the riskiness of international trading. This thesis aims to achieve a better understanding of the change in the firms’ hedging behavior caused by the intervention. It explains the crisis that led to the appreciation of the Swiss franc and introduces the most important hedging tools. Furthermore, based on the statements of 26 Swiss firms, it will be tested whether and how the firms have changed their derivative usage and with which rate they have covered their international trades. In a last step, the thesis investigates if firms that mainly depend on a different currency have shown different reactions in their changing of the hedging rate.

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Paper 1: Does Dual Class Share Structure Impact Performance or does it Exclusively Impact Perception? The issuance of non-voting shares has been a hotly discussed topic. Our paper aims at contributing on the issue analysing the effect of such a share structure on performance using a sample of all quoted firms in Italy, where deviations from one share one vote share structure is more common and the legal framework is very favourable for this kind of analysis because multiple voting shares are forbidden. This framework makes the difference between voting and non-voting shares crispier. Our findings are consistent with the fact that companies that chose not to have dual share structure or that had it and decided to unify their shares would suffer respectively from choosing it or reinstitute it. In contrast, for a few respected and well-established firms the negative price pressure related with the use of dual share structure does not take place probably due to their reputation. In this case, an eventual unification would probably be damaging in terms of price. These results are consistent with the fact that the dual share structure impacts the share price mostly through the negative perceptions related to this share structure. Paper 2: The Bankruptcy of Parmalat: Story, Mechanics and Analysis of the Fraud The paper gives an overview of the bankruptcy of Parmalat. It is aimed at explaining what mechanisms were set up in order to make this fraud possible. This essay also tries to delve into the role of all stakeholders (banks, auditors, institutional investors etc.) Thanks to some accounting tricks, which are described in detail, and political ties, the founder of the firm was able to get substantial amounts of financing and to generate a hole of about €14bn. In order to provide a bigger picture on the causes of the fraud, I also tried to put Parmalat’s case in the greater framework of Italian capitalism and to underline the damages produced in this story by “relational capitalism”. The role of investment banks and accounting firms is also described. Finally, I present a short summary of the main lessons that financial analysts should learn from Parmalat, focusing especially on the alarm bells that should be considered to identify fraud in advance. Paper 3: Do Stock Market Valuations Reflect Managerial Honesty? Firms with high accrual-based earnings management but low CEO incentives to engage in earnings management exhibit high excess returns (alphas), whereas firms with low earnings management despite high CEO incentives exhibit low alphas. This evidence suggests that the market assigns higher market values (and, therefore, lower future returns) to firms whose CEOs are committed to telling the truth (avoiding earnings management) even when it is personally very costly. After the introduction of the Sarbanes-Oxley Act, these differences decrease substantially, suggesting that investors perceive this regulation as a substitute to market discipline, thus reducing the inferences regarding managerial honesty that can be drawn from earnings management in the presence of financial incentives. Paper 1: Does Dual Class Share Structure Impact Performance or does it Exclusively Impact Perception? Die Diskussion über die Ausgabe von Aktien ohne Stimmrecht ist sehr aktuell und spannend. Die vorliegende Arbeit fokussiert auf ein tieferes Verständnis über den Effekt der Aktionärestruktur auf das Unternehmensergebnis. Der Effekt wird anhand einer Stichprobe aller börsenkotierten Unternehmen aus Italien analysiert. In Italien sind per Gesetz Aktien mit multiplen Stimmrechten verboten und Aktien ohne Stimmrecht sind mehr gewöhnlich. Innerhalb dieses gesetzlichen Kontexts ist der Unterschied zwischen stimm- und nichtstimmberechechtigten Aktien klarer definiert. Wir finden, dass Firmen die keine Dualstruktur haben, bzw. diese aufgegeben haben und die Aktien vereinheitlicht haben, ein schlechteres Ergebnis hätten, wenn Sie diese Struktur eingeführt bzw. aufrechterhalten hätten. Im Gegensatz dazu, finden wir für einige bekannte Unternehmen mit Dualstrktur, dass deren Aktienpreise, vermutlich wegen Ihrer Reputation, nicht von der Dualstruktur negativ beeinflusst werden. In diesem Fall würde sich eine Vereinheitlichung der Stimmrechte negativ auf den Preis auswirken. Diese Resultate sind kohärent mit der Tatsache, dass die Dualstruktur eine negative Wirkung auf den Aktienpreis wegen der negativen Wahrnehmung des Marktes zeigt. Paper 2: The Bankruptcy of Parmalat: Story, Mechanics and Analysis of the Fraud Diese Arbeit untersucht den Bankrott von Parmalat und erklärt die Mechanismen die implementiert wurden, um den Betrug durchzuführen. Dabei wird auf die verschiedenen Rollen von Interessengruppen (Banken, Wirtschaftsprüfer und institutionelle Investoren usw.) eingegangen. Mit Hilfe einer „kreativen“ Buchhaltung und den politischen Beziehungen, konnte der Gründer der Firma ein Finanzloch von ca. 14 Milliarden Euro verschleiern. Zum tieferen Verständnis wird der Betrug im Rahmen des Kapitalismus in Italien mit einem Fokus auf den „relational capitalism“ untersucht. Schlussendlich werden die Lehren, die aus diesem Skandal gezogen werden können, mit einer Liste von potentiellen Alarmsignalen aufgezeigt. Diese Liste ist insbesondere für Finanzanalysten interessant um einen potentiellen Betrug frühzeitig zu erkennen. Paper 3: Do Stock Market Valuations Reflect Managerial Honesty? Firmen deren CEOs über tiefe Entschädigungsanreize verfügen aber Ertragssteuerung („Earnings Management“) betreiben verfügen über eine hohe abnormale Rendite, gemessen an einem Vier-Faktoren-Modell. Hingegen haben die Firmen, deren CEO eine tiefe Ertragssteuerung und gleichzeitig hohe finanzielle Vergütungsanreizen haben, eine tiefere risikogewichtete Rendite. Diese Resultate deuten darauf hin, dass Finanzmärkte den Firmen deren CEOs sich zur Wahrheit verpflichten, trotz den hohen persönlichen Kosten, eine höhere Unternehmensbewertung zuweisen und diese Firmen deshalb eine kleinere Rendite aufweisen. Nach der Einführung des Sarbanes-Oxley Act in den Vereinigten Staaten wird diese Differenz kleiner und deutet darauf hin, dass die Marktdiszplin durch die Regulation ersetzt worden ist.

We analyze two firms’ choice between merging, allying, and trading assets. We consider a setting in which firms have assets, skills, and core capabilities; skills are the component of organizational capital that increases in the course of joint operations, core capabilities the component that does not. We find that the two firms trade assets for them to operate separately in case the two firms have high initial skills; the two firms merge in case they have similar core capabilities; they ally where there is little equilibrium double moral hazard. We compare the times to dissolution in the alliance with those to divesture or post-merger integration in the merger; for all but the last jointly operated asset, we find that joint operations cease earlier in the alliance than in the merger.

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