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Worthless companies
Author(s) -
Heaton J. B.
Publication year - 2018
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12167
Subject(s) - irrational number , valuation (finance) , equity (law) , debt , financial economics , economics , business , arbitrage , monetary economics , finance , geometry , mathematics , political science , law
Companies with worthless assets can have substantial efficient markets equity values and debt that trades near par if there is a probability that an irrational bidder will acquire the company. Even if most capital market participants recognize that the company's assets are worthless, efficient markets pricing of the worthless company's equity and debt precludes arbitrage, and it may be impossible to persuade the potential irrational bidder to abandon its plans. The worthless company hypothesis may shed light on the valuation of some high‐profile start‐ups, the 1990s dot‐com bubble, and the bad performance of some short sellers.