An Economist's View of Market Evidence in Valuation and Bankruptcy Litigation

Thu May 22 16:24:38 EDT 2014
By Dr. Faten Sabry and William Hrycay

Courts often face many challenges when assessing the solvency of a company whether public or privately held. For example, would a company with a market capitalization of several hundred million dollars possibly be insolvent? Or, would publicly-traded debt at or near par be conclusive evidence that the issuer is solvent at the time? Or, would a company's inability to raise funds or maintain its investment grade rating at a given time be sufficient to rule on solvency?

It is common in valuation and solvency disputes to have qualified experts with very different opinions on the fair market value of a company, often using the same standard approaches of discounted cash flows and comparables. In this article, Dr. Faten Sabry and William Hrycay  discuss the role of contemporaneous market evidence such as equity and debt prices in such disputes. The article also explores possible misinterpretations of market evidence and presents a brief overview of recent court decisions.

Versions of this paper were also published by Law360 and by the Harvard Law School Forum on Corporate Governance and Financial Regulation blog.